News

BHIC announced that its subsidiary Contraves Advanced Devices Sdn Bhd ("CAD“) has signed a contract with Cassidian Airborne Solution GmbH for the manufacture and supply of Airbus A400M mission systems, spares and logistics for an initial 140 chipsets. The contract will be implemented over a period of several years with no contract value disclosed due to security reasons.

Comment

We are positive on the award given the contract will expand its foothold into Europe’s defence sector and less depend on its bread and butter division – Littoral Combat Ships (LCS) Programme. Cassidian is the defence and security division of the EADS (European Aeronautic Defence and Space Company) group and a major provider of global security solutions, lead system integration and aerial, land, naval and joint systems.

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 accelerate the recognition of works involved in the mobilisation of LCS contract. Stronger quarterly result from 1QFY14 onwards will be the main re-rating catalyst for the stock. We maintain that, being one of 7 Petronas licensed 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.
• Forecasts
• Unchanged pending more contracts’ detail from company.

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 of RM3.41 pegged at an unchanged 10x P/E on higher FY14 EPS of 34 sen/share.

Source: Hong Leong Investment Bank Research - 23 Dec 2013