Company Name: BOUSTEAD HOLDINGS BHD
Research House: ECMLIBRA
Boustead Holdings Bhd (June 10, RM3.58)
Upgrade to buy at RM3.54 with higher target price of RM4.14 (previously RM3.56). We co-hosted an investors briefing with Boustead on Tuesday which was well attended by buy-side analysts and fund managers. We see for now three areas that can yield growth in coming years within the company's six divisions. These are plantations, heavy industries and'' properties.
Plantations will be positive if Sumatran estates are sold. Boustead's plantations segment generally underperforms the industry due to its underperforming Indonesian estates. They currently have 17,000ha in Indonesia of which 8,000ha are planted. Yields there have been dismal at roughly 10 tonnes/ha per annum.
The potential sale of this estate, should it materialise, will bring group yields to at least 23 tonnes per ha from the current less than 20 tonnes per ha group average. In terms of earnings, we estimate that it could raise FY11 plantation Ebit (earnings before interest and tax) by up to 60% (our FY11 Ebit estimate is currently RM150 million) hence enhancing the group's bottom line by some 16%.
Another item that would be significantly positive for Boustead is the expected award of contract to build another six vessels by the Royal Malaysian Navy. The segment currently has an order book of RM2 billion of which over 50% are jobs spanning up to five years.
As such, earnings could be subdued we believe, if new jobs are not awarded on time, especially the vessel jobs. It would boost their order book to over RM6 billion and provide earnings visibility for another five years to come.
Although it is still early, we believe the group will benefit from the spillover effect from LTAT (Lembaga Tabung Angkatan Tentera) being the prime beneficiary of government's land privatisation programme. First, we understand the Jalan Cochrane land is being offered to LTAT. Besides that, we note that LTAT reportedly has a 30% stake in the redevelopment project of the RMAF base in Sungai Besi.
There is potential for growth within the Boustead group and this will be slated for 2011 onwards. However, given that the timing of when their plans will materialise is vague, we are not raising our earnings just yet.
We do, however, want to take a more positive stance on the stock and are hence upgrading our call from hold to buy. We roll over valuations to FY11 EPS (earnings per share) and using the same historical average eight times PE (price-to-earnings), derive a target price of RM4.14 (previously RM3.56). To note, the group also makes for a good dividend play. ' ECM Libra Investment Research, June 10
This article appeared in The Edge Financial Daily, June 11, 2010.