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

Boustead Heavy Industries Corporation Bhd
(Oct 19, RM4.59)
Upgrade to buy at RM4.56 with revised fair value RM5.50: We upgrade our rating on Boustead Heavy Industries Corp Bhd (BHIC) from 'hold' to 'buy' with a raised fair value of RM5.50 per share by removing the 20% discount to our unchanged sum-of-parts valuation of RM5.50 per share. Our fair value implies an FY11F PER of 10 times.

BHIC's 21% effectively owned Boustead Naval Shipyard Sdn Bhd (BNS) has received a letter of intent (LOI) to construct six second-generation patrol vessels (PV) from the Ministry of Defence.

This announcement is not a surprise as we have highlighted that BNS would be securing the LOI soon, given that the sixth and final patrol vessel (KD Selangor) of the first generation batch is expected to be delivered next month.

While the value and duration of the project are still being negotiated with the government, we understand that the batch of six new PVs could reach a massive RM8 billion, assuming a 20% increase from the first batch's price tag of RM6.7 billion.

We understand that the letter of award will be despatched over the next four to six months after the price has been finalised.

We have already assumed a new order of RM7 billion from the six PVs in our assumptions, with the project expected to commence in 4QCY11. We have also assumed that 30% of the BNS contract will be undertaken by BHIC's Penang shipyard.

Admittedly, the group's earnings track record has disappointed over the past year. Hence, we maintain FY10F/12F earnings pending: (i) a significant quarterly earnings improvement; and (ii) the actual award of the new PV contract.

But the LOI indicates that the new flow of awards is likely to gather momentum, which could catalyse a re-rating on the stock. Other contracts in the pipeline could be: (i) New maintenance contracts for the first two patrol vessels, delivered in 2006, potentially worth up to RM60 million annually; and (ii) Two patrol vessels worth RM500 million each, for the Malaysian Maritime Enforcement Agency.

The stock currently trades at an attractive FY11F PER of eight times, which is a bargain for the sole military yard in the country with massive order book prospects. ' AmReseach, Oct 19


This article appeared in The Edge Financial Daily, October 20, 2010.