Boustead Holdings; Hold
Price Target: RM4.70; BOUS MK

Boustead Heavy Industries Corporation (BHIC)’s subsidiary Contraves Advanced Devices Sdn Bhd (CAD) has received and accepted two Letters of Award from Boustead Naval Shipyard Sdn Bhd for a total contract value of RM515m. This consists of the supply of:- (i) Thales Underwater Systems CAPTAS Towed Array Sonar complete with simulators for RM287m; and (ii) Thales Nederland BV SMART-S Main Surveillance Radar with simulators for RM228m and is in relation to the Littoral Combat Ships Programme. The total implementation period of this contract is up to 10 years.

This is a related party transaction and is the second award by Boustead Naval Shipyard to CAD so far. On 14 March 2013 it was also awarded a contract to supply BAE Systems Bofors Medium Calibre Gun 57 Mk3 with Stealth Cupola complete with simulator and ammunition range table for RM182.3m.

While the contract awards are positive and will supplement its RM9bn contract for the current batch of Littoral Combat Ships Programme, we do not expect significant earnings impact given the long duration of the contract of 10 years or RM51m per year on a straight line basis. Assuming that part of the technical expertise is contributed by its 49%-owned JV partner, Rheinmetall Defence, margins might be capped at the high single digit range.

We maintain our HOLD rating on Boustead with a TP of RM4.70 based on a 20% discount to SOP.

Source: HwangDBS Research - 23 Apr 2013