- We maintain our
HOLD call on Boustead Heavy Industries Corp (BHIC), with an unchanged fair
value of RM2.20/share, based on a 20% discount to our revised sum-of-parts
valuation of RM2.80/share. This implies an FY13F PE of 11x – half of Singapore
Technologies Engineering Ltd’s (STE) 21x currently.
- BHIC’s 51%-owned
Contraves Advanced Devices Sdn Bhd (CAD) has been contracted by the group’s
21%-owned Boustead Naval Shipyard Sdn Bhd (BNS) to supply BAE Systems Bofors
Medium Calibre Gun 57 Mk3 with Stealth Cupola complete with simulator and ammunition
range table worth Swedish krona 375mil (RM182mil), over a period of up to 10 years,
for the second generation of patrol vessels under the Royal Navy’s Littoral
Combat Ships (LCS) Programme.
- This is not a
surprise as we had indicated in our earlier reports that BNS will be
contracting works to BHIC to complete the massive LCS project, which is
expected to cost RM9bil.
- Recall that CAD was
awarded contracts worth up to RM2bil last year by BNS to procure, engineer, and
integrate the DCNS SETIS Combat Management System, a Combined Integrated
Communication System and Communications ESM System over a 10-year period.
- Together with this
new contract, we estimate that BNS to-date has awarded 25% of the LCS contract
value to BHIC’s subsidiaries, which will enable the group to consolidate the revenues
of the subcontracted works. As our forecasts have assumed that 30% of the LCS contract
value will be subcontracted to BHIC, we maintain FY13F-FY15F earnings.
- In the pipeline,
there are multiple military and commercial orders which could materialise this
year. These comprise contracts worth RM1bil for two patrol vessels and RM330mil
for 25 additional fast interceptor craft for the Malaysian Maritime Enforcement
Agency.
- We retain our
conviction that 2012 was a watershed year for the group, which has mostly cleaned
out its loss-making commercial projects and turned to a fresh page for the only
military yard in the country with a gross and net order book of RM10bil and
RM3bil, respectively. But for any significant re-rating on the stock to
materialise, BHIC will need to demonstrate a sustainable earnings turnaround,
coupled with a consistent execution record for timely delivery of projects. The
stock currently trades at a fair FY13F PE of 10x – against the stock’s
historical range of 8x-16x.
Source: AmeSecurities
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