Stock Name: BHIC
Company Name: BOUSTEAD HEAVY INDUSTRIES CORP
Research House: TA

Boustead Holdings Bhd
(July 27, RM3.91)
Maintain buy at RM3.90 with target price of RM4.40: We understand that Boustead's 65% owned subsidiary, BHIC is close to finalising the service and maintenance job for the navy's Scorpene submarines which, if it materialises, would potentially boost 2H2010 earnings.

We have highlighted in previous reports that this job could be worth RM1 billion to RM1.2 billion against RM600 million (over six years) as originally envisioned. The actual work already commenced in 1Q2010, although BHIC was not able to recognise the revenue as the contract is still being negotiated to include the expanded job scope.

Hence, 3Q2010 earnings may be substantially higher as the results would include three quarters recognition of the maintenance job.

To recap, a consortium comprising BHIC and French based DCNS SA (on a 60:40 equity basis) received the letter of intent (LOI) to undertake the maintenance and technical support for the two Scorpene submarines acquired by the Ministry of Defence.

We believe that Boustead is also close to securing the LOI for construction of the second batch of patrol vessels (PVs), which is in our view the most significant catalyst for re-rating of the share price.

We understand the contract value could be significantly higher at RM8 billion to RM9 billion (RM6.7 billion for the first batch) due to an upgrade to frigates, which are more technologically advanced than PVs. The group has already delivered five PVs and the last is scheduled for delivery in August/September. We think a successful completion and delivery of the first batch of PVs will significantly enhance Boustead's chances of securing the second batch.

Recall that the first batch, originally granted to PSCI Bhd, was plagued with numerous delays and scandals. Hence, we believe that from the government's perspective, completion of the first batch will be regarded as the main KPI before committing on the second batch.

We have also highlighted the possibility of BHIC clinching the service and maintenance contract for the first batch PVs.

We now understand that BHIC is in negotiation to secure the maintenance contract for the first three PVs that were commissioned in June 2006, August 2006 and June 2009, respectively. The contract value could range between RM20 million and RM30 million per PV, according to the management, compared with our initial estimate of RM30 million to RM40 million per PV.

However, no deal has materialised so far. That said, we note that it has been four years since the first two PVs were commissioned. Therefore, we believe the Navy is unlikely to delay any further the maintenance contract.

We maintain earnings forecasts and target price at RM4.40 based on sum-of-parts valuation methodology. We continue to see significant upside risk to earnings forecasts if management can deliver on new contracts, expand property development landbanks and extract merger synergy from the acquisition of Pharmaniaga.

Our current earnings forecasts are already some 12% lower than consensus, reflecting our conservative take on earnings outlook, particularly in the heavy equipment segment.

Maintain Boustead as buy. We continue to like the stock as a growth story and attractive dividend yield. ' TA Securities, July 27


This article appeared in The Edge Financial Daily, July 28, 2010.