Results

Broadly inline: YoY 1HFY13 PATAMI swung from losses to a profit of RM15m, making up 29% and 30% of HLIB and consensus forecasts full year estimates. Deviations

We expect stronger revenue recognition from the Littoral Combat Ship (LCS) work in 2HFY13 while profitability will no longer be impacted by the cost overruns from the old commercial shipbuilding projects.

Dividends

None.

Highlights

1HFY13 Revenue increased by 10% to RM126m due to improved utilization of tankers coupled with better charter rate in the chartering segment.

1HFY13 PAT swung from losses to a profit of RM15m as it is no longer impacted by the cost overruns from the old commercial shipbuilding projects and higher revenue recognition from the LCS project. QoQ PATMI margin improved from 7.9% to 16% largely driven by higher income from maintenance, repairs and overhaul (MRO) services and partially offset by loss in chartering segment.

This is the second consecutive quarter the company managed to register profit after six consecutive losses previously. This shows that the company is on the right path to recovery. In the commercial shipbuilding division, the company has completed the project that accounted for loses in FY12 and no longer impacted by the cost overrun. The company 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.

Speed of contract mobilisation of the LCS contract and the ability to translate the huge orderbook of RM10bn to bottomline are the critical factor in BHIC’s earning and valuation. Hence, we choose to be cautiously optimistic going forward and continue to monitor the situation closely.

We maintain that, being one of 7 Petronas licensed fabricators, future earnings could be 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.

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 RM2.64 based on unchanged 12x FY14 EPS of 22 sen/share.

Source:Hong Leong Investment Bank Research - 7 Aug 2013