Boustead Heavy Industries – 2QFY09 : Results Continue To Improve

· Mixed results
The group recorded 2QFY09 revenue of RM120.3m (+8.0% y-o-y, 3.9% qo-q), bringing the 1HFY09 revenue to RM236.1 (+11.2% y-o-y). Meanwhile its 2Q09 net profit came in at RM18.3m (-48.2% y-o-y, +19.8% q-o-q), resulting in 1HFY09 net profits coming in below house and consensus numbers. The y-o-y profits were mainly affected by higher costs and reduced share of profit from its associate due to lower progress billings of vessels construction. However, the improved q-o-q results were due to the delivery of a well testing and servicing vessel and the MUDA Living quarters structure for CARIGALI-PTTEPI Operating Company Sdn Bhd is in the final stages of completion.

· No known change in orderbook
The group’s orderbook is still estimated to have about RM600m in contracts, as there have been no indications of new contract being awarded in the past year. This means that Boustead Naval Shipyard (BNS) continues to be the earnings driver for the company during this troubled times. The group has stated that based on the existing order book, prospects for 2HFY09 are expected to reflect the trends established in the 1st 6 months. Due to this, we have reduced our earnings forecast for FY09, but maintain our FY10 and FY11 numbers. Going forward, the group plans to focus on lean inventory, process improvements, risk management and prudent cash flow management to ride out the challenging market outlook.

· TP raised but hold call maintained
We believe that there are indications of a turnaround at this point and also that the joint venture with DCNS S.A should bear fruit soon. There is also a potential of the group getting more shipbuilding contracts by the Malaysian Government once all the vessels for the current contract are delivered. As such, we have revised our TP upward to RM4.96 by using the group’s forward EPS of 38.2 sen and its average P/E of 13x. However due to the run-up in share price, we maintain our HOLD call on the stock, with a potential re-rating if it is awarded more government contracts.