News

BHIC announced that its subsidiary, BHIC AeroServices Sdn Bhd (“BHICAS”) received a letter of award from Ministry of Defence Malaysia for the maintenance and supply of spare parts for the Royal Malaysian Air Force EC725 Helicopters.

The contract value is RM220m for a period of 3 years.

Financial Impact

With assumption of i) PBT margin of 10%, ii) 3 years contract duration, iii) 51% stake in BHICAS, the contribution will be around RM3m per annum to BHIC’s bottomline.

Pros/Cons

We are positive on the award and this is in line with company’s strategy to focus more on maintenance, repair and overhaul (MRO) activities with better margin.

To recap, FY13 PAT was barely in the positive territory mainly due to chemical tankers’ impairment cost, losses from associate given revision in LCS project costs and cost overruns from its ship repair projects.

Given the negative variables of the chemical tankers and uncertain recognition of the LCS contract, we maintain 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

Unchanged pending more detail from management.

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 maintained our HOLD call with TP RM2.59 pegged at an unchanged 10x P/E on FY15 EPS of 26 sen/share.

Source: Hong Leong Investment Bank Research - 24 Mar 2014