Results

Below expectations: Although FY13 PATAMI swung from losses to a profit of RM3.2m, it still fell short of expectations, making up only 7% and 6% of HLIB and consensus forecasts full year estimates, respectively. Excluding impairment cost of RM16.7m from chemical tanker, core earning registered RM20m vs our full year forecast of RM46m.

Deviations

Mainly due to chemical tankers’ impairment cost, losses from associate arising from revision in LCS project costs and cost overruns from its ship repair projects. As a result, 4QFY13 fell into the red.

Highlights

FY13 Revenue increased by 24% to RM319m due to higher income from MRO activities as well as better utilisation and charter rate for chartering segment.

However, FY13 PAT barely profit making mainly due to chemical tankers’ impairment cost, losses from associate given revision in LCS project costs and cost overruns from its ship repair projects.

We were surprised by the loss making results in 4QFY13, after three consecutive quarter of profit. Given the negative variables of the chemical tankers and uncertain recognition of the LCS contract, we are turning more cautious and conservative going forward. BHIC will need to demonstrate consistent execution to deliver the project on time for any rerating on the stock.

We maintain that, being one of 7 Petronas license 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. 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.

Risks

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

Forecasts

FY14 and FY15 earnings cut by 16% and 21% respectively due to lower margin assumption on LCS contract after cost overruns from LCS and ship repair projects.

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 downgraded our call from BUY to HOLD with TP cut from RM3.39 to RM2.59 pegged at an unchanged 10x P/E on lowered FY15 EPS of 26 sen/share.

Source: Hong Leong Investment Bank Research- 21 Feb 2014