News

BHIC announced that its subsidiary Contraves Advanced Devices Sdn Bhd (“CAD”) has received 2 letters of award (LOA) from 20% associate, Boustead Naval Shipyard (BNS) (which is also a subsidiary of Boustead Holding which in turn is BHIC Major shareholder), to supply i) Thales Underwater Systems CAPTAS Towed Array Sonar complete with simulator, and ii) Thales Nederland BV SMART-S Main Surveillance Radar with simulators for the Littoral Combat Ships Programme at a total value of RM287m and RM228m respectively.

The contract duration is up to 10 years from the commencement date.

The awards are expected to have positive impact from FY13 onwards.

Comment

We are neutral on the awards and it is related to the mobilisation of the RM9bn littoral combat ship (LCS) contract held under BNS.

Speed of contract mobilisation is the critical factor in BHIC’s earnings and valuation. We believe contracts are in the process of being mobilisation, however, when the contracts will be realised on the bottom line is still nebulous. The contract time frame is 10 years which suggests that profit contributions will be spread thin over the period. We are cautiously optimistic going forward and continue to monitor the situation closely.

We maintain that, being one of 7 Petronas licence fabricators, future earnings maybe enhanced by spill over jobs from offshore O&G fabrication work if it is able to show good track record in executing existing jobs and protect margins.

Risks

• Sacrificed profits while in technology transfer phase.
• Delays in contract disbursement.
• Potential write downs from selling chemical tankers.

Forecasts

• Maintained. The awards are in line with our assumptions that the company’s top line will be boosted by RM333m per annum in FY13 - FY15 from BNS’ LCS related contracts.

Rating

HOLD

• Positives –
  • Sole Royal Navy yard with strong order book.
  • Located in a key naval strategic location and O&G yard.
• Negatives –
  • Earnings drag due to defence technology assimilation.
  • Uncertainty from operating chemical tankers.

Valuation

• We maintain our HOLD call with an unchanged TP of RM2.20 based on unchanged 10x FY14 EPS of 22 sen/share.

Source: Hong Leong Investment Bank Research - 23 Apr 2013