- 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.

- BHIC’s 51%-owned Contraves Advanced Devices Sdn Bhd (CAD) has secured two contracts worth RM515mil from the group’s 21%-owned Boustead Naval Shipyard Sdn Bhd (BNS) to supply:- (1) Thales Underwater Systems CAPTAS Towed Array Sonar complete with simulators, and (2) Thales Nederland BV SMART-S Main Surveillance Radar with simulators. These contracts will be executed 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 30% of the LCS contract value to BHIC’s subsidiaries, which will enable the group to consolidate the revenues of the subcontracted works. We maintain BHIC’s FY13F-FY15F earnings as we have already assumed that 30% of the LCS contract value will be recognised in the group’s revenues.

- 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 11x – against the stock’s historical range of 8x-16x.

Source: AmeSecurities