BHIC; Buy; RM3.17
Fair Value: RM4.00; BHIC MK

BHIC's 51%-owned Contraves Advanced Devices Sdn Bhd (CAD) has secured 3 letters of award  (LOAs) worth RM1.5bn from its 21%-owned Boustead Naval Shipyard Sdn Bhd (BNS) for the RM9bn 2nd generation offshore patrol vessels (OPV) contract.

CAD will undertake engineering and integration works in connection with the DCNS SETIS Combat Management System (CMS), as well as the procurement of the CMS and the Rheinmetall Fire Control System. The 3 LOAs carry a total ceiling contract sum of RM1.532bn for up to 10 years from the commencement date of the contracts. Recall that BHIC acquired a 51% stake in CAD from Rheinmetall in Jun10 at RM26m, implying 7.5x FY09 earnings. CAD has a niche in commercial as well as radar and  defence electronics manufacturing.

BHIC also clarified that this contract is a recurrent party transaction, for which a shareholder mandate has been received during the company's AGM on 5th Apr 2012. The LOAs do not come as a surprise as we  have highlighted previously that BHIC is bound to benefit substantially from the RM9bn OPV contract given its leading role in weaponry, combat system, vessel design, naval electronics etc, though BNS is the contract
holder.

We have assumed BHIC to undertake 30% of the RM9bn OPV contract from BNS, therefore we maintain our earnings forecast. We continue to like BHIC for its enviable monopolistic position in naval vessel construction and maintenance works for the Royal Malaysian Navy. Reiterate our Buy call with RM4.00 TP, based on 12x FY12 EPS.

Source: HwangDBS Research - 10 April 2012