Results

Below expectations: YoY 9HFY12 PATAMI swung from RM9m to a loss of RM59m versus HLIB and consensus forecasts of RM7m and RM13m PATAMI respectively.

Deviations

Less maintenance repair and overhaul (MRO) jobs, losses from commercial ship building, chartering the unwanted chemical tankers and losses due to a ship building job.

Dividends

None.

Highlights

YoY... 9M Revenue increased by 12% to RM432m YoY making up 87% and 84% of HLIB and consensus full year estimates. Higher revenue from defence projects was dragged down by less MRO jobs. 

QoQ associate earnings from the mobilisation of the RM9bn littoral combat ship (LCS) contract rose slightly to RM2.6m but fell well short of expectations, YTD the RM3.2m makes up only 17% of our full year estimates. 

The key negative variables of the chemical tankers and uncertain recognition of the LCS contract is in line with our conservative stance on the company. 

Going forward earnings clarity from potential write downs on the sale of the chemical tankers and uncertainty over LCS contract recognition is murky. Even under our blue skies scenario of RM53m FY13 earnings based on a 10x multiple the TP is 2.10, 17% below the current trading price.

Risks

• Sacrificed profits while in technology transfer phase.
• Delays in contract disbursement.
• Potential write downs from selling chemical tankers.

Forecasts

We have decreased our FY12 PATAMI from a profit of 17.5m to a loss of RM62m, we maintain FY13 and FY14 forecasts.

Rating

HOLD

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

We continue to keep BHIC insight because it is Malaysia’s sole naval yard, strategic location and O&G potential. However, due to increasingly poor earnings visibility on a rising share price, we prefer to be conservative until we see clarity in the commercial business division and stronger recognition of the RM9bn LCS contract. Hence we downgrade to a SELL call base on an unchanged TP of RM2.10 based on 10x FY13 P/E.

Source: Hong Leong Investment Bank Research - 21 Nov 2012