Results

Below expectations: 1HFY14 PATAMI fell 22% yoy to RM12m versus HLIB and consensus full year forecast of RM49m and RM43m respectively.

Deviations

Mainly due to slow progress of its Littoral Combat Ships (LCS) project.

Highlights

2QFY14 revenue increased by 8% YoY and 4% QoQ mainly due to higher average charter rate and marginal contribution from Belum topside project. QoQ, its JV companies swung from losses to profit mainly due to contribution from new helicopter maintenance contract secured from the Government of Malaysia in 2014.

However, 1HFY14 profit only represented 24% of our full year forecast mainly attributed to slow progress of its Littoral Combat Ships (LCS) project. With the signing of the formal contract worth RM9bn in July 14, the progress of work is expected to accelerate going forward.

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. The recent acquisition of land in Klang for O&G fabrication could benefit the company as it is looking for news sites to expand 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 cut by 24% mainly due to slower recognition of LCS contracts.

Rating

CEASE COVERAGE, TP:RM2.36

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

Maintain TP of RM2.36 pegged at an unchanged 10x P/E on FY15 EPS of 23.6 sen/share.

Officially cease coverage on the stock due to uuncertain recognition of the LCS contract and bleak outlook on chemical tankers.

Source: Hong Leong Investment Bank Research - 14 Aug 2014