BHIC- a possible trading BUY

Background

Boustead Heavy Industries Corp Bhd ('BHIC')'s principal activities are shipbuilding, ship-repairing, oil and gas fabrication, hook up and commissioning and fabrication of steel structures. Other activities include providing services in relation to weapons and electronics, arsenal, missiles, telecommunication and navigation systems and defense-related products, supply and service of marine and naval defense-related products.

Formerly known as PSC Industries Berhad, BHIC had completed a restructuring scheme in August 2007. The stock had a sharp run-up from RM1.50 to a high of RM7.75 in December 2007.

Recent Financial Results

BHIC has just announced its results for 1Q2009 ended 31/3/2009 on May 15. When compared to the previous corresponding quarter (1Q2008), its net profit dropped by 51% from RM31.1 million to RM15.3 million despite a 14.6%-increase in turnover from RM101 million to RM116 million. On the other hand, its net profit improved upon the preceding quarter (by a mere 2.4%) due to lower tax provision while pre-tax profit was 15.3% lower on the back of a 31.6%-decline in turnover. The changes in turnover was attributable to changes in progress billing, while 1Q2009 bottom-line was also affected by reduced share of profit from associate (due to lower progress billing on vessel construction).



Valuation

BHIC (closed at RM3.76 at the end of the morning session) is now trading at a trailing PE of 9.4 times (based on the last 4 quarters' EPS of 40 sen). This may appear too optimistic since the last 2 quarters' EPS was about 6 sen each. Assuming that the next 3 quarters' EPS is about 6 sen, then BHIC's 2009 estimated EPS would be about 24 sen- giving it a current PE of 15.7 times. As such, BHIC appears over-valued.

Technical Outlook

BHIC broke above its downtrend line at RM2.50 in March. Thereafter, the share price congested & formed a pattern known as 'bearish wedge'. This wedge is named as such because it has a tendency to break to the downside. However, BHIC did the opposite & broke to the upside today. This breakout is however achieved on fairly thin volume. Can it sustain? We will have to wait & see.


Chart: BHIC's daily chart as at 20/5/2009_12.30noon (Source: Quickcharts)

Conclusion

BHIC could be a trading BUY based on technical consideration. On the fundamental front, the stock appears expensive. It may secure more contracts in the near future which may boost its top-line & bottom-line.