Period  1Q14

Actual vs. Expectations Boustead Holdings (Boustead) reported core net profit of RM66m (-33% YoY) which came in below both our expectations and consensus. 1Q14 net profit accounts for 17% and 15% of our full-year estimate and consensus forecast, respectively. The negative variance from our forecast is due to lowerthan-expected contribution in its heavy industries division.

Dividends  A first interim single tier DPS of 7.5 sen was declared.

Key Result Highlights QoQ, the 1Q14 net profit came in at RM66m (+70% QoQ). However, stripping out gains from the

disposal of Al-Hadharah Boustead REIT (RM136.8m) in 4Q13, 1Q14 core net profit was 23% lower. The poor set of results was due to : (i) weaker contribution from property; and (ii) lower-than expected contribution in the heavy industries division, mainly the lower progress billings from the Littoral Combat Ship project despite the absence of cost overrun from ship repair projects and impairment of long outstanding trade receivables. However, the star performer was the plantation division largely helped by higher average CPO price which more than offset a 12% reduction in FFB production. Meanwhile at EBIT level, property contribution was lower but rose at pre-tax profit level largely due to fair value gain of investment properties.

 YoY, 1Q14 core net profit fell 33% due largely to lower contribution from property division and lowerthan-expected contribution in the heavy industries division. However, the star performer was plantation division driven by higher average CPO price. The average CPO price rose 13% to RM2,629/tonne. However, FFB crop fell 2% to 253,108 tonnes.

Outlook  Boustead’s prospects are expected to be mixed.

 We expect the trading & manufacturing, and pharmaceutical divisions to show growth and deliver sustainable recurring incomes. The trading & manufacturing division’s growth will be underpinned by its captive market from Boustead Petroleum Marketing Sdn Bhd, which conducts marketing and distribution of petroleum products under the BHPetrol retailing brand. Its pharmaceutical division is supported by Pharmaniaga Logistics’ government concession agreement.

 The plantation earnings meanwhile will hinge largely on CPO price movements since 91% of its plantation lands are already matured of which outlook over the medium -term looks promising.

 For the property division, the earnings growth is likely to be flat in the absence of new large-scale property projects launching of late.

 The heavy industries division is expected to remain stable. However, we are uncertain whether there will be any potential future cost overruns for its legacy commercial projects.

Change to Forecasts  We are cutting our FY14E and FY15E net profit forecasts by 5% following the poor set of results. Further potential downgrades from our core earnings pending the launching of Boustead Plantations initial public offering prospectus (due to earnings leakage from minorities from listing of Boustead Plantations).

Rating & Valuation  Maintain MARKET PERFORM. We have lowered our SoP value from RM5.52 to RM5.27. Our SoP revision took into account of the following; (i) a roll-forward in our base-year valuation from FY14E to FY15E, (ii) our revised lowered in-house target price for Affin Holdings Bhd from RM4.60 to RM4.00, and (iii) its listed entities valued based on their latest consensus target prices.

Risks to Our Call  Further weakness in CPO prices.

 Delays in the delivery of LCSs and cost escalations.

Source: Kenanga