TA on BHIC Target Price : RM5.70

Weak 4Q09 Earnings
4Q09 results were generally below our expectations. Revenue actually rose 13.4% QoQ to RM163.6mn, thanks to higher progress billing. Pretax profit on the other hand
declined 21.5% QoQ to RM22.0mn as a result of 23.6% contraction in operating profit. We understand that operating margin was affected by some cost overrun in relation to the chemical tanker contract as well as RM6mn in LAD booked in the quarter. In addition, contribution from Boustead Naval Shipyard S/B (BNS) also declined by 14.2% due to lower progress billing. However, YoY, net profit rose 24.2%, indicating the pace of work continued to increase.

Full Year Earnings Below Expectations
Consequently, FY09 earnings fell short of our expectations. Bulk of the discrepancy was attributable to higher cost incurred. Revenue though was in line with our estimate. All in, revenue increased 9.6% to RM543.9mn on the back of higher progress billing. Operating profit however declined 17.9% YoY due to the cost overrun and LAD payment mentioned above. Associate contribution declined by over 50% YoY to RM22.1mn. The comparison was distorted by a reversal of notional tax charge amounting to RM21.2mn in FY08. Excluding the one-off item, associate contribution would have declined by only 7.1% YoY due to lower progress billing. As a consolation though, the group declared 6 sen single-tier dividends (5.5 sen in FY09), translating
into 1.3% yield at the current price.

Submarine Issue Being Resolved
We understand that the technical defect that caused KD Tunku Abdul Rahman unable to dive is close to being resolved currently. At this juncture, we do not expect any
material impact on BNS arising from this issue. As for the life extension contracts for the two military corvettes, we understand that the contract details are being
finalized and expected to start contributing to bottomline in 2H10.

Order Book Replenishment High On Agenda
Current order book amounted to c. RM850mn and management continues to be upbeat on securing new contracts in FY10 although they are tightlipped on thedetails. Out of the RM850mn, RM600mn is for construction of OPVs (under its 20.77% associate, BNS).
According to management, the fifth OPV is already close to being delivered to the navy and the work on the sixth OPV is expected to complete by mid-2010.

Recommendation
Earnings Forecast Revised Lower
We have made several changes to assumptions, 1) FY10 revenue estimate revised lower by 13.4% after imputing a more conservative outlook in the potential new order book.
We now assume RM500mn worth of new contracts in FY10, 2) updated balance order book for the Ops contract, and 3) margin assumption adjusted higher as we do not expect
further significant cost overrun or LAD payment in FY10. The net impact is a 12.9% downgrade in FY10 net profit estimate to RM118.6mn.

Lower TP But BHIC Remains A Buy
Target price revised lower to RM5.70 but BHIC remains a Buy as the 24% upside potential to the share price. The target price is based on 12x target PER, a slight premium compared with long term average PER of 11x. We think the modest premium is justified given the relatively conservative earnings assumptions and high likelihood of BNS securing fresh OPVs contract by the end of the year.