- We maintain our BUY call on Boustead Heavy Industries Corp (BHIC), with an unchanged fair value of RM3.80/share, based on a 20% discount to our sum-of-parts valuation of RM4.75/share. This implies a FY14F PE of 9x – half of Singapore Technologies Engineering Ltd’s (STE) 18x currently.

- BHIC’s 21%-owned Boustead Naval Shipyard (BNS) lost a civil suit in the Ipoh High Court, which allowed a RM6mil claim from a contractor, Maraputra, which had earlier undertaken an infrastructural contract to build additional single-storey assembly workshops and extensions to the ship transfer rail at the Lumut shipyard. The Court also dismissed BNS’ counterclaim of RM10mil.

- Back in July 2010, Maraputra claimed damages of RM10mil against BNS from the contract dispute, which led to BNS likewise counter-claiming for the similar sum against the contractor.

- The amount involved is insignificant, as a full provision for the suit by associate BNS will only effectively amount to 3% of BHIC’s FY13F net profit. Hence, we maintain our FY13FFY15F earnings, as the group is planning to appeal against the High Court decision to the Court of Appeal.

- Currently, the group has gross and net order books of RM10bil and RM3bil respectively. But we expect further newsflow of new contracts in the pipeline pending the announcement of the 2014 Budget, and against the backdrop of the Lahad Datu incursion which highlights the dire need for tighter security measures.

- The upcoming fresh orders may comprise of two patrol vessels potentially worth RM1bil and 25 additional fast interceptor crafts valued at RM330mil for the Malaysian Maritime Enforcement Agency.

- Additionally, the group, which has a Petronas’ major fabrication license, is still open to nonmilitary-based projects given the country’s huge oil and gas development prospects.

- The stock currently trades at an attractive FY14F PE of only 6x – 70% below STE’s current valuation.

Source: AmeSecurities