News

BHIC announced that its wholly-owned subsidiary, Boustead Penang Shipyard has secured a contract for the EPCC of Belum Topsides for SK309/311 Phase 2 Sarawak Gas Development Project from Murphy Sarawak Oil.

The contract value is RM108m and expects to complete in June 2015.

Comment

We are positive on the award and in line with our view that being one of 7 valuable Petronas licensing fabricators, BHIC stand to benefit from the 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.

The 26 acres Penang Shipyard is involved in fabrication works include oil and gas substructure, topsides, modules and engineering structure. We understand that the company is looking for news sites across Malaysia to expand the capacity of its fabrication yard as the Penang yard cannot be expanded due to the Second Penang Bridge.

We understand that BHIC and THHeavy were final bidders for this contract with BHIC emerging as winner. We believe this is a relatively smaller topside contract of below 5k mt and Penang shipyard is able to handle another job with similar size. With the assumption of EBIT margin for the EPCC contract at 10%, we estimate the contract to contribute RM5.4m and RM2.7m to BHIC’s bottomline in FY14 and FY15 respectively.

We are becoming more confident about the company’s execution ability after three consecutive quarters of profit, turnaround from 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.

Currently, the basic design of the LCS programmes is already finished with detail design likely to be completed by end of 2014 and physical construction by 1Q15. First combat ship is expected to delivery in 2018. We gather that formal agreement for LCS contract is expected to sign by end of 2013. Once the agreement signed, the company can start to recognise some works involved in the mobilisation of LCS contract. Stronger quarterly result from 1QFY14 onwards will be the main re-rating catalyst for the stock.

Risks

• Sacrificed profits while in technology transfer phase.
• Delays in contract disbursement.

Forecasts

We raised our FY14 and FY15 earnings by 7% and 3% respectively after factored in the RM108m EPCC contract.

Rating

BUY

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 maintained our BUY call with TP raised from RM3.20 to RM3.41 pegged at an unchanged 10x P/E on higher FY14 EPS of 34 sen/share.

Source:Hong Leong Investment Bank Research - 25 Nov 2013