- We maintain our HOLD call on Boustead Heavy Industries Corp (BHIC) with an unchanged sum-of-parts-(SOP) based fair value of RM2.40/share. This implies an FY14F PE of 16x – near our FBM KLCI target of 16.5x.

- We maintain BHIC’s FY14F-FY16F for now on expectations of improved margins in 2HFY14, even though the group’s 1QFY14 net profit of RM0.8mil was way below our FY14F earnings forecast of RM37mil and street’s RM51mil.

- BHIC’s 1QFY14 earnings were largely eroded by an associate loss of RM3mil due to delays in the execution of marine repair and overhaul division, and charter loss of RM1mil arising from its 3 chemical tankers. But EBIT margins were still higher at 10% in 1QFY14 compared to 6% in 1QFY13.

- Note that BHIC registered a much higher 4QFY13 loss of RM28mil due to impairment provisions of RM17mil for its chemical tankers, and associate losses of RM18mil due to changes to the work scope and costs for the 6 littoral combat ships.

- We understand that the delivery delays in the group’s 21%-owned Boustead Naval Shipyard is likely to persist until 2QFY14, which could constrain any potential earnings rebound until 3QFY14.

- As expected, the group did not declare any interim dividend given that none was declared in FY13 due to the weak results.

- With gross and net order books of RM10bil and RM3bil respectively, the group is still hoping for further military orders given the need for tighter security measures in East Malaysia following the Lahad Datu incursion last year.

- BHIC is hoping to secure two patrol vessels potentially worth RM1bil in total, and 25 additional fast interceptor crafts valued at RM330mil for the Malaysian Maritime Enforcement Agency. But the timeline for such orders remain uncertain given the country’s current fiscal deficit.

- With its Petronas’ major fabrication licence, BHIC is targeting fresh oil & gas contracts. But this segment offers lower margins and BHIC’s weak execution track record remains a concern.

- Given the group’s poor results in this quarter and over the past years, we view that the key re-rating catalyst for the stock still hinges on a clear turnaround of its quarterly earnings performance.

- Hence, the stock currently trades at a fully-valued FY14F PE of 17x - 5% above our FBM KLCI target. 

Source: AmeSecurities