Target Price : RM6.22
Market Capitalisation : RM3,019.4m
Recommendation : BUY
Analyst : James Ratnam
Wednesday, 20 Aug 2008
1H08 Earnings up 99%
Boustead delivered another strong quarter of earnings growth. 2Q08 net profit rose 69.8% YoY to RM151.9mn on the back of 82% increase in revenue, although on QoQ comparison, net profit was lower due to decline in FFB output and increase in harvesting cost. 1Q08 net profit rose to RM304.2mn, a 99.1% increase YoY and accounts for 58% of our FY estimate.
Better Performance from Key Business Divisions
Both plantation and property division performed better compared with last year although bulk of the higher profit was due to consolidation of earnings from the heavy industries. The heavy industries accounted for 64% of the increase in 1H08 pretax profit.
Plantation division benefited from both, higher selling prices (+52.8% to RM3,314 per tonne) and to a lesser extent, increase in FFB production (+1.3% YoY), partially offset by lower harvest mature 11% due to disposal of the Indonesian land bank. The property division profits meanwhile rebounded strongly in 2Q08 due to sale of two corporate lots as well as higher income from its property investment, particularly Royale Bintang hotels and The Curve.
Lucrative Margin from OPV Contracts
Management has always been tightlipped about the profit margin of the OPV contracts. The heavy industries division reported RM202.4mn operating profit on RM680.5mn revenue, which translated into 29.7% operating margin. Excluding the contribution from BHIC, we estimate margin from the OPV contracts could be in the region of 30%, higher than our initial 15% - 20% estimate.
Upgrade in Earnings Forecasts
We revise downward our average CPO selling price to RM2,900 per tonne (from RM3,300 per tonne previously) this is inline with the weak price trend 2H08 to-date. FY09 selling price assumption remains unchanged at RM3,200 per tonne as we expect price to recover in 4Q or early next year. Concurrently, we revise upward margin assumption for the OPV contracts to 30% from 20% previously. The net impact is a 4.3% - 9.5% upgrade in FY08 - FY10 earnings forecasts.
RM6.22 Revised TP. Boustead is an Attractive Buy
We roll over our valuation base year to FY09 and cut the heavy industries division targeted PER to 9x from 12x previously mainly due to the sharp de-rating of the regional oil & gas sector, which only trading at 8x PER. Consequently, we lower our price target to RM6.22. Nonetheless, the stock has corrected significantly and even after the target price revision, potential capital appreciation is close to 30% and therefore, Boustead remains a buy.
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