News

Boustead to acquire: 1) 26.63 acres land in Klang for RM72.5m; 2) 11.82 acres of land in Klang together with a 5- storey cruise terminal and a jetty for RM164.3m; 3) 25.22 acres land in Klang for RM62.3m; and 4) 6.21 acres land in Klang for RM10.8m.

Total consideration of RM310m is above the market value of RM260m as ascribed by Messrs. CH Williams Talhar & Wong Sdn Bhd given the potential for fabrication and vessel husbandry services.

Boustead intends to develop the land into an O&G yard for fabrication of onshore and offshore structures and modules as well as to complement its other existing business of maintenance, repair and overhaul (MRO) of vessels, shipbuilding and ship repair. Moreover, the existing terminal building and jetty is already a port of call for major cruise lines which provide stable income to the group.

Financial impact

Net debt will increase from 126% to 132% while impact on earnings is premature to determine at this juncture (given lack of details) as the development into a fabrication yard would take time.

Pros / Cons

This move is in line with the company’s intention of 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. Moreover, being one of 7 Petronas license fabricators, future earnings may be enhanced by spill over jobs from O&G fabrication work.

However, in the short-term, there will be additional drag from financing the land acquisition (potentially issuance of perpetual Sukuk) as well as additional RM100m to develop the O&G fabrication yard before any potential contributions over the longer term.

Risks

Lower than expected revenue contributions from different divisions and/or margins falling short of expectations as well as relatively high gearing and dilution from potential cash call.

Forecasts

We take this opportunity to reflect the dilution from the listing of its plantation arm which resulted in FY14 and FY15 earnings forecasts cut by 14.3% and 15.4%, respectively.

Rating

BUY

Positives –

• Still undervalued, relatively high and quarterly net dividend yield, earnings sustainability and market yet to fully appreciate the hidden values.

Negatives –

• Relatively high gearing and complicated group as well as quarterly fluctuation in earnings.

Valuation

Target price cut to RM6.23 (10% holding company discount to estimated SOP of RM6.92) from RM6.66 to reflect the dilution in listing of its plantation arm.

Source: Hong Leong Investment Bank Research - 24 Jul 2014