More contract awards in the pipeline for BHIC

by **Cals** Thu 03 Oct 2013, 09:51

Business & Markets 2013

Written by AmResearch

Thursday, 03 October 2013 09:45

BOUSTEAD HEAVY INDUSTRIES CORP [] Bhd
(Oct 2, RM2.47)
Maintain buy at RM2.37 with a fair value of RM3.80: We maintain our “buy” call on BHIC with an unchanged fair value of RM3.80 per share, based on a 20% discount to our sum-of-parts valuation of RM4.75 per share. This implies a forecast FY14 price-earnings ratio (PER) of nine times — half of Singapore Technologies Engineering Ltd’s (STE) 18 times currently.

As indicated in our report on Aug 7, BHIC’s 21%-owned Boustead Naval Shipyard Sdn Bhd (BNS) has received an amended acceptance letter from the ministry of defence for an earlier award in December 2011 to design, construct, equip, test and deliver six second-generation patrol vessels, called Littoral Combatant Ships (LCS), for the Royal Malaysian Navy.

This announcement essentially confirms that the contract value has been fixed at RM9 billion compared with an earlier indicative ceiling price of the same sum. Also, the advance payment of RM700 million will be made in stages.

We maintain BHIC’s FY13F to FY15F ending Dec 31 earnings on expectations of a significant year-on-year surge in earnings for 4QFY13 as BNS has yet to recognise progress billings from the LCS contract to date.

With the 10-year LCS contract, which commenced on Dec 29, 2011, terminating on Dec 28, 2021, BHIC’s 1HFY13 had only accounted for 31% of our FY13 earnings.

Currently, the group has gross and net order books of RM10 billion and RM3 billion respectively.

But we expect further news flow of new contracts in the pipeline pending the announcement of Budget 2014, and against the backdrop of the Lahad Datu, Sabah, incursion earlier this year which highlighted the dire need for tighter security measures.

The upcoming fresh orders may comprise two patrol vessels potentially worth RM1 billion and 25 additional fast interceptor craft valued at RM330 million for the Malaysian Maritime Enforcement Agency.

Additionally, the group, which has a Petroliam Nasional Bhd major fabrication licence, is still open to non-military-based projects given the country’s huge oil and gas development prospects.

The stock currently trades at an attractive FY14F PER of only six times, which is 70% below STE’s current valuation. — AmResearch, Oct 2

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This article first appeared in The Edge Financial Daily, on October 03, 2013.