This article first appeared in The Edge Financial Daily on March 3, 2020

Boustead Holdings Bhd
(March 2, 75.5 sen)
Maintain market perform with a lower target price of 80 sen: Financial year ended Dec 31, 2019 (FY19) core net loss (CNL) came in at RM198 million compared to our net loss forecast of RM41 million due to higher-than-expected losses from heavy industries and plantations. No dividend was declared for this quarter and for FY19 as expected.

For year-on-year, FY19 recorded CNL of RM198 million excluding: i) gains from sale of a plantation land (effectively amounting to RM68.6 million) from 57.42%-owned Boustead Plantations Bhd; ii) one-off impairment on personal protective equipment (RM310.5 million); iii) impairment of goodwill (effectively amounting to RM626 million from 82%-owned Boustead Naval Shipyard Sdn Bhd [BNS]); and iv) a write-off in effectively 5%-owned Pharmaniaga Bhd amounting to RM138 million due to revision in the useful life of the rights to supply and provision of stock write-off related to the voluntary Ranitidine product recall compared to a CNL of RM292 million in FY18, no thanks to losses on heavy industries and plantations.

However, the losses narrowed due to better contributions from trading and services. Plantations’ was lower due to lower crude palm oil (CPO) and palm kernel oil prices. The heavy industries division posted a deficit on the back of weaker results from its operating units. BNS incurred heavier losses mainly due to revision of margins and variation of milestones achieved for the littoral combat ship project, though partially offset by higher gross profit from ship repair activities and the littoral mission ship project. Boustead Heavy Industries Corp Bhd was impacted by a lower contribution from maintenance, repair and overhaul activities and reduced share of profit from joint-venture companies.

The group is expected to continue seeing volatile quarterly results based on its historical volatile earnings trend. All in, we expect plantation earnings to anchor the bulk of earnings, and since 91% of its plantation estates are already matured. This hinges largely on CPO price movements of which the outlook over the short-term looks cloudy. The heavy industries division remains volatile with quarterly earnings oscillating between profits and losses. We expect the trading and manufacturing as well as pharmaceutical divisions to show pedestrian growth but deliver sustainable recurring income. — Kenanga Research, March 2