(Sept 30, RM4.91)
Initiate coverage with buy call at RM4.45 with target price of RM6.60: We initiate coverage of Boustead with a “buy” rating and RM6.60 target price based on 20% discount to sum-of-parts (SOP) value. Our core investment thesis is three-fold:
1) More proactive management. Major shareholder, LTAT, is looking to raise Boustead’s free float by cutting its 60% stake to 50% by end-2010. It also recently bought 86.1% of Pharmaniaga Bhd, a government healthcare service provider, which would allow for vertical integration within the group and aid in the 55% EPS growth for FY2011F. We think the market has not priced in the significant earnings accretion. On the cards is also the potential sale of its Indonesian plantation estates (about 18,000ha) that are capping its current blended FFB yield at 16.7 tonnes per hectare.
2) GLC-property proxy. Its property arm is due for a major transformation as LTAT is currently finalising two lucrative government land deals — (i) 60 acres of Jalan Cochrane land and (ii) the 245-acre Batu Cantonment army base in Jalan Ipoh, both in Kuala Lumpur. Both developments will have a MRT station. We estimate these projects could add RM2.05 per share, raising our SOP value to RM10.35. This excludes more recently the rights to claim highly valuable land in Penang. Execution risk is minimal premised on its highly successful development in Mutiara Damansara.
3) Surge in contracts for BHIC. BHIC is expected to capitalise on the next batch of six out of 27 patrol vessels from the Royal Malaysian Navy. If the initial six vessels were a benchmark, this contract could be worth at least RM6.7 billion, almost triple its RM2.5 billion order book value. Our new order win assumptions are conservative at RM800 million per year for FY2010 to FY2012F.
Boustead’s valuation is appealing at a one-year forward PER of seven times and 0.9 time P/NTA, while offering a 5% yield. These are roughly at its historical mean levels, but we expect valuations to expand when the market recognises the earnings-accretive Pharmaniaga acquisition and the formalisation of the two key land deals.
Boustead’s current RM4.2 billion market capitalisation implies its lucrative plantation assets, growing property business, and trading arm, are currently trading at only six times CY2011 earnings. — HwangDBS Vickers Research, Sept 30
This article appeared in The Edge Financial Daily, October 1, 2010.
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