Highlights

We recently met with the management of BHIC for an update on the company after a slew of contracts awarded to the company relating to the RM9bn Littoral Combat Ship (LCS) programme, see our notes dated 23 Apr 2013, 15 Mar 2013 and 04 Feb 2013. To recap BHIC has exposure to the LCS programme through a 20% interest in Boustead Naval Ship which holds the contract and a circa 30% exposure for managing the programme.

Currently the design and organisation of the programme is underway and is expected to be completed by 2H FY14 and physical construction by 1Q15. Circa 10% of the contract value is the design phase. BHIC has sent 30 engineers to France for technical training and knowledge transfer related to the programme.

In the commercial shipbuilding division, the company has completed the project that accounted for loses in FY12 and is now focusing on smaller, less complex and more profitable projects while in the chartering division the chemical tankers are still dragging the company’s bottom line.

Comment

We maintain our cautiously optimistic view, detailed in our 4Q earnings review dated 22 Feb 2013. The recent mobilisation of contracts, on-going design and planned physical construction by 1Q15 reiterate our view that the mobilisation of the LCS contract is stronger than implied.

Given the mobilisation of the LSC contracts and absence of the lose making project, we expect the company to return to the black in 1Q. However, we maintain that uncertainty on the speed of contract recognition and a history of downside surprises still makes the risk reward ratio unappetising.

Hence, we believe that even though the stock price may have bottomed, we would rather miss out on the first part of the upswing until we have more clarity over earnings. We continue to monitor the situation closely.

Risks

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

Forecasts

Maintained.

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 - 26 Apr 2013