Results

Below expectations: 1QFY14 PATAMI dropped 85% yoy to RM0.8m versus HLIB and consensus full year forecast of RM67m and RM52m respectively.

Deviations

Mainly due to higher losses from associate and JV companies involved in MRO work for the Royal Malaysia Navy because of cost overruns and reduced contribution from the manufacturing business.

Highlights

1QFY14 Revenue fell 42% QoQ due to reduced revenue recognition for certain construction contracts. YoY operating profit increased due to better margin from heavy engineering and lesser losses from chartering business.

However, 1QFY14 PAT barely profit making mainly due to losses from associate given revision in LCS project costs and cost overruns from its ship repair projects.

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.

However, given the negative variables of the chemical tankers and uncertain recognition of the LCS contract, we maintain our cautious and conservative view going forward. BHIC will need to demonstrate consistent execution to deliver projects on time for any rerating on the stock.

Risks

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

Forecasts

FY14 and FY15 earnings cut by 27% and 9% 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 maintain our HOLD call with TP cut from RM2.59 to RM2.36 pegged at an unchanged 10x P/E on lowered FY15 EPS of 23.6 sen/share.

Source:Hong Leong Investment Bank Research - 9 May 2014