News

BHIC announced that its subsidiary Contraves Advanced Devices Sdn Bhd (“CAD”) has received a 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 Torpedo Launching System for the Littoral Combat Ships (LCS) Programme.

The contract duration should be 10 years but no contract value was disclosed. The award is expected to have positive impact from FY14 onwards.

Comment

We are neutral on the awards. This contract is related to the mobilisation of the RM9bn LCS contract held under BNS. We understand that CAD will secure around total RM3bn contract from BNS under the LCS programme. With assumption of i) PBT margin of 5%, ii) 10 years contract duration, iii) 51% stake in CAD, the contribution will be around RM8m per annum to BHIC’s bottomline.

Despite the contract win, BHIC will need to demonstrate consistent execution to deliver the project on time for any rerating on the stock.

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 at 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 licenced fabricators, future earnings may 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 - 12 Nov 2013