Saturday October 23, 2010
BHIC may start work on patrol vessels only late next year
THE construction of six patrol vessels by Boustead Heavy Industries Corp Bhd (BHIC), a maritime engineering and defence-related services provider, may only begin as early as the fourth quarter of next year.
Analysts estimate that it can easily take another year before BHIC’s letter of intent (LOI) is firmed up and construction of the patrol vessels begin.
“This is as seen with the company’s Scorpene service job, which took a year for the LOI to be firmed up via the letter of award,” ECM Libra said in a research report.
BHIC received a LOI from the local Defence Ministry to construct six second-generation patrol vessels with combatant capabilities.
In its filing with Bursa Malaysia on Monday, the company says its associate company, Boustead Naval Shipyard Sdn Bhd (BN Shipyard), received the letter dated Oct 15. It adds that the value and duration of the project are to be negotiated with the Government.
However, AmResearch Sdn Bhd says the value of the six new patrol vessels can reach RM8bil, based on a 20% mark-up from the first batch’s price tag of RM6.7bil.
“We understand that the letter of award will be despatched over the next four to six months after the price has been finalised,” it says.
ECM Libra adds that the new order for six patrol vessels with combatant capabilities, littoral combatant ships, has more technical specifications than the first-generation batch which amounted to some RM1bil per vessel.
“We believe per unit cost should be higher. Assuming a value of RM1.2bil per vessel, the contract will provide BN Shipyard with an RM7.2bil orderbook that will likely last it five to seven years,” it adds.
The recent contract, which has been long awaited, is part of a privatisation agreement with the Government for the construction of 27 units of patrol vessels, where six have been completed.
In 1998, BN Shipyard was awarded a contract to construct and deliver six patrol vessels to the Royal Malaysian Navy. The first two were delivered in 2006, followed by two more in 2009. The first two are being used to patrol the waters off Sabah and Sarawak while the third and fourth patrol vessels are guarding the east coast of the peninsula.
According to the BHIC’s 2009 annual report, the remaining two patrol vessels were launched in November 2008 and July last year respectively.
HwangDBS Vickers Research says the second-generation patrol vessels will be built at BHIC’s Lumut shipyard, which is currently 50% utilised. However, AmResearch estimates that 30% of BN Shipyard’s contract will be undertaken by BHIC’s Penang shipyard (Jerejak).
AmResearch has upgraded its call on the stock from a “hold” to “buy” with raised fair value of RM5.50 per share by removing the 20% discount to its unchanged sum-of-parts valuation of RM5.50 per share.
“Our fair value implies a financial year 2011 (FY11) forecast PE (price/earnings) of 10 times. The stock currently trades at an attractive FY11 forecast PE of eight times, which is a bargain for the sole military yard in the country with massive order book prospects,” it said.
BHIC was awarded a contract worth some RM1.3bil by the government to service the two Royal Malaysian Navy Prime Minister-class Scorpene submarines in August.
The contract was given to its subsidiary, Boustead DCNS Naval Corp Sdn Bhd, a joint venture with DCNS SA, a French defence company, and was effective for a period ending Nov 30, 2015.
The contract differed in value from the original letter of intent of RM600mil dated June 4, 2009 due to the inclusion of a full submarine integrated logistics support package.
AmResearch points out that the group’s earnings track record has disappointed in the past year and it maintains FY10 to FY12 forecast earnings pending a significant quarterly earnings improvement and the actual award of the new patrol vessels contract.
For the six months ended June 30, BHIC’s net profit was down 4% to RM31.5mil as a result of cost escalations due to delays in completing certain shipbuilding projects, coupled with reduced contribution from associates. Revenue fell 18% to RM192.9mil from a year ago.
“But the LOI indicates a new flow of awards is likely to gather momentum, which could catalyse a re-rating on the stock,” it adds.
Other potential contracts in the pipeline include new maintenance contracts for the first two patrol vessels, which were delivered in 2006, potentially worth up to RM60mil per annum, and two patrol vessels, worth RM500mil each, for the Malaysian Maritime Enforcement Agency (MMEA).
This is on top of the RM130.7mil contract secured by BHIC from the Government to design, construct and commission 10 units of fast interceptor craft for MMEA.