- 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.

- BHIC and the Ministry of Defence have finalised the terms of a RM15mil contract, which was awarded back in March 2013, for the maintenance, repair and supply of spare parts for the Gun Oerlikon 35mm and Radar Skyguard to the Malaysian Army.

- This means that it took the group more than a year to finally settle the terms of the agreement, much longer than the 3-week period needed for formalisation of the RM220mil In-Service Support contract to provide maintenance and supply of spare parts for EC725 Helicopters for 3 years to the Royal Malaysian Air Force in April this year.

- Besides these contracts, there are other military contracts that are still pending the formalisation of terms. These include the contract, awarded back in December 2013, to manufacture and supply of Airbus A400M mission systems, spares and logistics for an initial 140 shipsets from Cassidian Airborne Solutions GmbH.

- These delays in the formalisation of contract terms and actual recognition of revenues from earlier awards continue to raise concerns over the group’s earnings visibility, given BHIC’s poor quarterly results performance over the past years.

- 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 past weak execution track record does not position the group favourably for the roll-out of Petronas’ multiple oil & gas fabrication jobs.

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

Source: AmeSecurities