12-Month Target Price: MYR6.00
BUY
Market Value - Total: MYR3,019.4 mln
Siti Rudziah Salikin
Summary: Boustead is one of Malaysia’s oldest conglomerates with over 70 subsidiaries and associated companies. Its operations are grouped into six core businesses, namely plantation, property, heavy industries, finance & investment, trading, and manufacturing & services.
Results Review & Earnings Outlook
Boustead’s 1H08 net profit nearly doubled to MYR304.2 mln from MYR152.8 mln in 1H07 and accounted for 62.7% of our original fullyear forecast. However, we view YTD performance to be only slightly better than our expectations as we are projecting a softer 2H given the drop in palm oil prices, and we have a cautious view on the property and financial services sectors due to the uncertain economic outlook.
At the PBT level, plantation profit for 1H surged 2.6x YoY to MYR177.8 mln buoyed by the strong palm oil prices. Heavy industries contributed MYR149.8 mln due to the consolidation of Boustead Naval Shipyard and Boustead Heavy Industries (BHIC MK, MYR4.06, Hold), which began in 3Q07. The property division’s profit rose 20.7% YoY to MYR53.3 mln, helped by gains from the sale of two corporate lots in 2Q08 and better performance of the Royal Bintang hotels and The Curve. The finance/investment division’s profit was lower at MYR8.8 mln as 1H07’s results included a large negative goodwill realized. BH Insurance also posted lower profit due to higher claims and a writedown of investments in quoted securities, which offset the higher profit from the Affin Group.
We have fined-tuned our forecasts and raise our net profit projection for 2008 by 11.7% and for 2009 by 7.2% after factoring in: (i) a one-off gain of MYR30 mln from the sale of its Indonesian plantations (completed in July 2008); and (ii) the net positive impact of the privatization of Boustead Properties (as at July 24, 2008, Boustead holds 97.7% of Boustead Properties).
Recommendation & Investment Risks
We downgrade our call on Boustead to Buy (from Strong Buy) with a revised 12-month target price of MYR6.00 (from MYR7.00).
Trading at a 2008 PER of 5.6x, we believe the concern over weaker palm oil prices has been factored into the share price. The recent downtrend in palm oil prices is within our expectations and we anticipate a price recovery in 4Q due to seasonally stronger demand and low production period. In spite of its earnings diversity, Boustead’s share price is influenced by the volatility of palm oil prices and the general trend of plantation stocks, in our opinion.
We continue to use a PER-based sum-of-parts method (using discount-to-peers’ multiples) to value Boustead and add our projected dividend of 20 sen for 2008 to arrive at the target price. However, we have cut down our assigned PERs for plantations (due to the drop in multiples for its peers) and the heavy industries division (in line with the recent downward revision of our target multiple for BHIC).
Risks to our recommendation and target price include the cyclicality of palm oil prices, an economic slowdown and interest rate movements. There are also risks of executing the shipbuilding contracts within the stipulated time frame without excessive cost overruns.
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