Maintain hold at RM3.54 with target price raised to RM3.56 (from RM3.30): Annualised, Boustead’s net profits for 1QFY10 came in some 20% below our estimates and 10% below consensus estimates.

The key area where the shortfall came compared to our expectations was in the heavy industries segment. Otherwise, other segments performed within expectations. Year-on-year (y-o-y), earnings of the group as a whole were better predominantly due to a higher crude palm oil (CPO) average selling price (ASP) but on a quarter-on-quarter (q-o-q) basis, its bottom line was softer due to lower contributions from Affin Holdings.

For 1QFY10, the group achieved a CPO ASP of RM2,499 per tonne which is below the MPOB average price of RM2,569 and that helped the segment turn in a PBT (profit before tax) that was 163% higher y-o-y. Besides this, fresh fruit bunches (FFB) yields were also better y-o-y and FFB production was up 1.5% y-o-y and a good 9.6% q-o-q.

The group said yields in Peninsular Malaysia have been better this year after a period of tree stress over FY09. To note, matured hectarage in the peninsula makes up 35% of total group estates.

Indonesia continues to bring the group’s average down however and until the estates are sold, the full potential of Boustead’s plantation segment will not be realised.

Earnings of BHIC were off to a slow start this year with current total yard utilisation at only 60% and the group completing several commercial vessel jobs over 4Q09.

Besides that, Boustead Naval Shipyard has only one more vessel to be delivered (currently the vessel is being tested) and now awaits a new tranche of vessels to be built from the Royal Malaysian Navy.

Towards the 2H, we expect some pick-up in earnings with the commencement of the RM700 million ship life extension job.

Another job likely to be commenced this year is the Scorpene submarine job which has as yet not been finalised. In any case, we are taking a more conservative stance and trimming our earnings expectations from BHIC.

Adjusting down our assumptions on the heavy industries segment, we lower our FY10 EPS (earnings per share) by some 8.8%. We are switching our valuation on Boustead from sum-of-parts to historical PEs (price-to-earnings).

Since 2009, Boustead has traded at an average PE of nine times and we are pegging this multiple to FY10 EPS deriving a target price of RM3.56 (previously RM3.30). To note, the group announced a single-tier five sen first interim dividend for the quarter. — ECM Libra Investment Research, June 1