BJC Heavy Industries

BJC Heavy Industries Plc

Investment thesis
BJCHI expects to sign an LOI with Petrobras for fabrication work tied to the construction of an offshore oilfield floating production, storage and offloading facility (FCPO) by the end of this month, which we believe will catalyze its share price. The new work would assure our revenue and earnings targets for this year. The market has not yet priced in this substantial project. BJCHI currently trades at an FY14 PER of 12x and has an FY14-16 earnings CAGR of 16%. Our BUY rating stands with a YE14 target price of Bt45, pegged to a PER of 14x.
Most of our revenue forecast is secured by the contract backlog
Revenue is forecast to increase 15% YoY to Bt4,496m in FY14. The current backlog on-hand is Bt4,400m, of which Bt3,300m is to be recognized during 2Q-4Q14 (the remaining Bt1,100m in FY15). Note that BJCHI posted operational income of Bt854m for 1Q14, so 92% of our top-line forecast has either been realized already or is secured by the backlog. Furthermore, the firm is likely to win three more contracts worth a total of Bt1,400m, some of which would be recognized this year.
Bright prospects for the year ahead
Petrobras is a huge state-controlled Brazilian oil & gas company. Some of its recently-proved fields are far out at sea and require FPSO facilities in order to start operating because building pipelines to shore wouldn’t be commercially viable. The indications are that Petrobas will commission the construction of about six FPSOs a year. BJCHI has so far worked as an engineering sub-contractor on two Petrobras FPSOs. We expect the firm to win contracts valued of Bt100-300m tied to FPSOs this year. Eventually, BJCHI should start winning direct orders from Petrobras (rather than just sub-contracting to an EPC contractor), which would boost its GM.
Stronger QoQ earnings in 2Q14 and beyond
We expect QoQ growth in 2Q14 earnings with the delivery of Bt600m of fabrication work for the Asia-Pacific LNG project in Australia (which will compress coal seam gas into LNG for export). BJCHI’s work on the project has a 40% GM, much fatter than the 25% GM posted for 1Q14. The 1Q14 numbers constitute the nadir of FY14—we forecast hefty QoQ revenue growth for 2Q-4Q14. Furthermore, GPM will fatten, as most of the slim-margin work for the year was delivered and realized in 1Q14.
We conservatively model for GM of 32% for the final nine months of FY14, down from 40% in FY13. Our sensitivity analysis suggests that for every 1% that GM were to exceed our number, net profit would beat our forecast by 4.2%.