- 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.

- As indicated in our report on 7 August this year, BHIC’s 21%-owned Boustead Naval Shipyard (BNS) has received an amended acceptance letter from the Ministry of Defence Malaysia for the earlier award back in December 2011 to design, construct, equip, test and deliver 6 Second-Generation Patrol Vessels named as Littoral Combatant Ships (LCS) for the Royal Malaysian Navy.

- This announcement essentially confirms that the contract value has been fixed at RM9bil compared to an earlier indicative ceiling price of the same sum. Also, advance payment of RM700mil will be made in stages.

- We maintain BHIC’s FY13F-FY15F earnings on expectations of a significant YoY surge in 4QFY13 earnings as BNS has yet to recognise progress billings from the LCS contract to date. With the 10-year LCS contract starting from 29 December 2011 to 28 December 2021, BHIC’s 1HFY13 had only accounted for 31% of our FY13 earnings.

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

- The upcoming fresh orders may comprise 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