- We maintain our HOLD call on Boustead Heavy Industries Corp (BHIC), with an unchanged sum-of-parts based fair value of RM2.90/share which implies an FY13F PE of 15x ' a 15% discount to Singapore Technologies Engineering Ltd's (STE) 18x.
- BHIC's 9MFY12 net loss of RM59mil (reversal from a net profit of RM9mil in 9MFY11) was expected, as forewarned in our report dated 29 June this year. The losses stemmed largely from further provisions for Swire Pacific Offshore Ltd's final accommodation crane barge, which will finally be delivered next month.
- For now, we maintain FY12F-FY14F earnings which already incorporate the additional cost and delays in the Swire accommodation work barge deliveries till the end of the year. These delays for the group's sole remaining commercial project stem from weak execution capabilities, and were exacerbated by a weak external charter market which led to Swire imposing stringent quality requirements.
- While BHIC was awarded a RM1.5bil contract from the group's 21%-owned Boustead Naval Shipyard to undertake engineering and integration work for the six Littoral Combat Ships' combat management systems in April this year, the initial contributions this year are not expected to significantly reverse losses in the group's commercial division.
- BHIC's 3QFY12 loss widened 58% QoQ to RM27mil despite a 30% increase in revenue to RM185mil. This stemmed mainly from the ongoing losses from the Swire commercial project, partly offset by improved manufacturing and marine chartering contributions. Recall that one of the tankers was chartered to Japan's Asahi Tankers Co Ltd while the other two are essentially on spot charters.
- We retain our conviction that 2012 may prove to be a watershed year for the group, which would have cleaned out its loss-making commercial projects by 4QFY12 and turned to a fresh page for the only military yard in the country with a gross and net order book of RM10bil and RM3bil, respectively.
- But for any significant re-rating on the stock to materialise, the group will need to demonstrate a sustainable earnings turnaround, coupled with a consistent execution record for timely delivery.
- The stock currently trades at a fair FY13F PE of 13x ' a 28% discount to STE, the leading provider of military equipment, arms and services to Singapore.