BJH Heavy Industries

3Q14 Preview: Earnings growing QoQ BUY

BJH Heavy Industries Plc (BJCHI)

represents a fall of 30% YoY from last year’s 3Q peak of Bt404mn, it reflects growth of

31% QoQ from Bt211mn in 2Q14 and will be the second quarter of growth after the low

in 1Q14 of Bt168mn. We note that this low reflected the completion of a large project

for APLNG. 2H14 revenue is estimated at Bt2.6bn, in line with company target. We

estimate 3Q14 revenue of Bt1.27bn, +42%YoY and +30%QoQ. 4Q14F earnings should

grow from 3Q14 upon a gradual increase in revenue form Petrobras.

Promising gross margin but not as good as in 2013. At its peak in 3Q13, BJCHI had

a gross margin at 41%. This subsequently plunged to 25% in 1Q14. Margin then showed

some recovery to 29.4% in 2Q14 and we expect continued widening to 29.6% in 3Q14.

Net margin in 3Q14 is also expected to be a much better 21% than the 15% in 1Q14,

stable from 2Q14.

Petrobas holds promise. New client Petrobras is supplying steadily more contracts

after starting in 4Q13, and this has helped lift backlog to Bt3.9bn in 3Q14. From Bt5.0bn

in 2014, we expect backlog to continue to rise to Bt6.9bn in 2015, Bt5.6bn of that from

Petrobras, the rest from Laing O’ Rourke and others. This does not include more jobs

that will come from APLNG before it starts up in mid-2015. BJCHI expects APLNG to

open bidding for a new phase of LNG investment in 2015.

Brazil also on the scene. Petrobras, a new client for BJCHI, owns oil refineries and oil

tankers and is a world leader in development of advanced technology for deep-water

and ultra-deep water oil production. This is the first year BJCHI has gotten work from

such a high-profile client. BJCHI’s job will be to produce the modular/floating

production storage and offloading units used by Brazil’s oil and gas industry over a

period of 15 months. We expect this client to lead BJCHI to report high construction

revenue growth in 2014-2018. Although gross margin will be narrower than it was for

APLNG, this could be a long-term relationship bringing large and sustainable work.

BUY with target price at Bt60. BJCHI holds a solid financial position with debt to

equity ratio of only 0.1x, and 2015 PER at ~10x. It also offers a good ROE at 25% and

good dividend yield of 5-6% p.a. (XD and payment in May). We value BJCHI at Bt60 on

industrial 2015 PER of 15.0x (average PER +0.5x S.D). BUY.