FY18 Core Net Loss (CNL) came in at RM286.5m compared to our full-year net profit forecast of RM104m due to lowerthan-expected contribution from Plantations and higherthan-expected losses at Heavy Industries. We are cutting our FY19E earnings by taking into account the lower contribution from heavy industries. Maintain MP and SoPTP of RM1.50

FY18 Core Net Loss (CNL) came in at RM286.5m compared to our full-year net profit forecast of RM104m due to lower-than-expected contribution from Plantations and higher-than-expected losses at Heavy Industries divisions. Surprisingly, a 4th interim dividend was not declared compared to a 2.5 sen in 4Q17 bringing FY18 DPS to 5.0 sen which is below our expectation. We cut our DPS assumption to 3.0 sen from 10.0 sen for FY19E.

Result Highlights. QoQ, 4Q18 CNL widened to RM276m excluding impairment of goodwill (RM106.2m), impairment of PPE and other receivables (RM107.5m), gains from sale of PPE (RM2.7m) and net fair value gain on investment properties (RM32.7m) compared to RM253.8m in 3Q18 excluding gains from disposal of PPE (RM12.3m) largely dragged down by losses at Heavy Industries division. The Heavy Industries was dragged down by increased share of loss in a joint-venture company as a result of provision for LAD as well as revision in the LCS project cost due to variation orders and increase in its project finance cost, pending customer’s approval.

YoY, FY18 recorded CNL of RM286.5m excluding impairment of goodwill (RM106.2m), impairment of PPE and other receivables (RM107.5m), gains from sale of PPE (RM12.5m) and net fair value gain on investment properties (RM32.7m) compared to FY17 core net profit of RM181.3m (excluding gains from sale of a plantation land effectively amounting to RM318.6m from 57.42%-owned Boustead Plantations), impairment of PPE, receivables and good will amounting to RM107.6m and net fair value gain on investment properties (RM43.9m) no thanks to losses at heavy industries and weaker contributions from Plantation, Property and Heavy Industries divisions. The Heavy Industries division was dragged down by increased share of loss from a joint-venture company, provisions for liquidated ascertained damages and revision in the Littoral Combat Ship (LCS) project cost due to variation orders and increase in its project finance cost. The Plantation division recorded an operating loss of RM110m due to decline in prices and sales volumes of palm products, increase in interest cost to finance the acquisition of Pertama estates and higher operating expenditure.

Outlook. The group is expected to continue seeing volatile quarterly results based on several past quarters’ volatile trends. All in, we expect plantation earnings to anchor the bulk of earnings, and since 91% of its plantation estates are already matured, it will hinge largely on CPO price movements of which the outlook over the short-term looks cloudy. The Heavy Industries division remains volatile with quarterly earnings oscillating between profits and losses. We expect the trading & manufacturing as well as pharmaceutical divisions to show pedestrian growth and deliver sustainable recurring incomes.

Maintain MP, downgrade FY19E net profit by 30% taking into account the lower contribution from heavy industries. Our SoP-TP is maintained at RM1.50 implying PER of 39.5x based of FY19E EPS since (Boustead Heavy Industries Berhad is valued based average market price in the SOTP). Risk to our call is higher-than-expected earnings at Heavy Industries.

Source: Kenanga Research - 1 Mar 2019