-  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 value of RM2.80/share. This implies an FY13F PE of 11x – half of Singapore Technologies Engineering Ltd’s (STE) 21x currently.

-  The Edge Financial Daily reported that BHIC has formally entered into contracts worth RM47mil from the Ministry of Defence to supply 6 Fennec helicopters to the Royal Malaysian Navy. These include an award to BHIC’s 51%-owned BHIC Aeroservices Sdn Bhd (BAS) and wholly-owned BHIC Defence Techservices for 3-year installation, service and supply contracts worth RM32mil for the 6 Fennec helicopters.

-  This formal contract, of which an award of RM32mil for the 6 helicopters was earlier announced in January this year, is not a surprise given that BHIC has just signed a Maintenance, Repair and Overhaul (MRO) Centre Agreement with Eurocopter to mutually agree to the appointment of BAS as the Approved MRO Centre of Eurocopter. The MRO Centre provides for maintenance needs for Fennec, Dauphin and EC725 helicopters and other potential Eurocopter products.

-  Recall that the Eurocopter group is 100%-owned by EADS (European Aeronautic, Defense and Space Company), one of the largest aerospace groups in the world. Back in mid-2010, BHIC formed BAS with Prestige Pillar S/B – a marketing consultant – with the latter having a 30% effective stake, while Eurocopter Malaysia S/B has 19%.

-  Assuming a pre-tax margin of 10%, this maiden helicopter contract will contribute additional earnings of RM1mil or 1% of FY14F net profits. Hence, we maintain FY13F-FY15F earnings pending a meeting with management next month. But we are positive on this long-delayed development as the group could potentially secure another service contract for another 10 EC 725 Super Cougar Eurocopters that have been ordered by the Royal Malaysian Air Force.

-  We retain our conviction that 2012 was a watershed year for the group, which had 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 11x – against the stock’s historical range of 8x-16x.

Source: AmeSecurities