Saturday, July 28, 2007

Boustead – Annual Report FY 2007 Review Part 1

I am doing this review of Boustead’s Annual Report mainly as a form of practice, as I am still rather “green” to the detailed review process of Annual Reports. Any comments or suggestions on how to improve my analysis are welcome, and I also invite readers to do their own analysis for any points/notes I may have missed out. Of course, since Boustead is a tightly-owned company (the CEO Mr. Wong Fong Fui had just increased his stake to 31% yesterday with a transfer of shares from nominee accounts), I would expect less readers to have the Annual Report or even be vested.

Still, the Annual Report can be downloaded from the company’s website at and I can be fairly certain that they are a company which delivers on their promises as they have had a 5-year track record of growth in revenues and profitability. This was largely due to the foresight of the chairman who sold off unprofitable business units and concentrated the company’s core competencies into energy conversion, water and wasterwater as well as industrial real estate solutions. Now leaner (and arguably meaner !), the Group continues to bid for higher value projects and seeks larger contracts in the Middle East and around the globe. This is the reason why the Annual Report’s name is “Being Focused”. I shall comment on this later in the post.

Chairman’s Message - An Analysis

The first and most distinct thing I noticed from the chairman’s first 4 paragraphs is that he gives a very honest and candid appraisal of the Group’s performance, without resorting to evasive or flowery language. The words “disappointment” and “performed below our expectations” for the water and wastewater division are used which signify that he is genuinely disappointed at the performance of this division and is not attempting to gloss over it. Even during the 1H 2007 results announcement, there was no attempt to hide the fact that some business units were performing below expectations. This candid approach earns points from me as I value honesty and admittance of mistakes by Management who is sincere in seeking shareholders’ understanding of the poorer performance. Of course, if Management still fails to deliver after several quarters, then one has to suspect that Management may not be able to turnaround the business; but so far Boustead has managed to deliver steady growth for 5 consecutive years.

The report title “Being Focused” is also given an explanation: the Group had spent a couple of years divesting their non-core assets and business units (such as their marketing, distribution, food, insurance and power generation businesses), choosing instead to focus on their core business units which represent the greatest growth potential for the Group. It is this focused mindset which is also synonymous with Warren Buffett’s focused investing principles; which advocate that a person/company concentrate on what he does best or what he knows best in order to achieve the highest returns. I have personally seen many companies trying to do anything and everything, losing their focus in the process and eroding their margins and earnings as costs mount. Sometimes, trying to do too much within too little a time frame can be detrimental and disastrous for a company.

The Chairman is cautiously optimistic that FY 2008 will be a better year, though he states that global oil prices remaining high would be a continued catalyst for growth for the Group. He also expects the water and wastewater division to start contribution more substantially to the Group’s bottom line, as the Middle East Water Solutions Alliance led by Salcon has yet to produce tangible results in the form of contracts. The upturn in the construction sector and continued increase in the property sector asset valuations would do good for Boustead’s Industrial Real Estate solutions division, as they are focusing on high-end industrial solutions for global clients.

Operations Review

Energy-Related Engineering Division

Boustead’s energy related engineering division consists of Boustead International Heaters “BIH” (which is a global specialist in engineering direct-fired heat process systems and waste heat recovery systems) and PT Boustead Maxitherm “BMI” which is a highly regarded combustion engineering specialist. This division experienced the strongest growth with the highest revenue contribution being recorded to date of S$130.6 million. It also clinched the largest engineering contract to date of S$36 million. They have continued to clinch major contracts from international oil giants (prominent customers) and are continually expanding their global presence into markets such as Middle East, North America and West Africa. This expansion is positive for the Group’s prospects as this means their global expertise is being more recognized, plus they have the endorsement of major oil companies which can fuel (no pun intended) their expansion.

BIH will focus efforts to capture more of the South American market for FY 2008 as it has identified good potential business in that region. For BMI, higher oil prices have also prompted interest in sourcing for alternative sources of energy. A few that are currently “hot” are alternative fuels like bio-fuels and bio-diesel or solar panels to harness the sun’s energy. Solid energy waste recovery systems are also gaining more demand and recognition as a good source of alternative energy as it makes use of material such as sugar bagasse (a waste product) in Indonesia to generate energy. Prospects look good for BMI as oil prices probably will not move downwards anytime soon, thus fuelling more demand for BMI’s expertise in designing such systems to cut down fuel usage for companies.

Water and Wastewater Engineering Division

For this division, Salcon Pte Ltd (“Salcon”) is the leading international water and wastewater specialist who is the only Asian vendor outside of Japan to be pre-qualified by international EPC contractors (a strong and sustainable competitive advantage). It experienced declining division revenue as the revenue contribution from 1H 2007 was weak, but it managed to salvage itself somewhat with a S$25 million contract for the building of Phase II Extension for the Bedok Newater Factory in 2H 2007, thus the total decline only came to about 13.1%.

If one looks closely at the numbers, the division revenue had declined by 13.1% but division contracts secured increased to S$57 million in FY 2007. This would imply that most of the contracts revenues and profits are to be recognized in FY 2008. The selection of Salcon as the anchor company for the water solutions alliance has yet to bear fruit, but the Alliance targets to capture a total project value of S$500 million by the end of 2009 (which will flow into FY 2010 for Boustead as their year-end is March 2009). Since there are about 8 companies in the Alliance, the revenue share of the S$500 million is expected to be about S$62.5 million spread out over 3 financial years. This brings it to only about S$20+ million per year, hardly enough to sustain the growth of Salcon. I would see it as imperative for Salcon to leverage on its expertise to grow their business elsewhere and not to rely too much on impending good news from the Alliance as it may not be as rosy as once thought.

Even the operations review states that business conditions will remain “challenging” for Salcon is FY 2008, and I see this as a warning that revenues and profits may not be sustainable for this division in the long run unless the Group manages to build up their competence, expertise and network in this area more effectively.

Industrial Real Estate Solutions Division

The Group’s real estate solutions division is managed by Boustead Projects Pte Ltd and they are a leading industrial estate solution provider in Singapore. FY 2007 was the division’s best performing year to date, with revenues of S$124.8 million. Contracts secured for FY 2007 hit a new high at S$211 million, with new clients such as Berg Propulsion and UMS signing on deals with Boustead Projects to build industrial leasehold properties. With such a good track record, I would think this division is poised to grow more strongly in the coming years as the Singapore property market also shows an upturn. The division’s profitability was affected by sand shortages for FY 2007, but this should be a one-off problem and for FY 2008, higher profitability and better margins are expected.

Their overseas ventures may also bear fruit as projects are expected in countries such as Vietnam, Malaysia and China. Recall too that in early May 2007, Intellasia news (a leading news agency website for Vietnam news) reported that the Ministry of Industry has given in-principle approval for Boustead Projects to construct a thermo-power plant with a contract value of US$500 million in Dinh Binh province. The final decision rests with the central government and Boustead is unlikely to recognize the full bulk of the US$500 million as they probably need to partner with another company for a project of this scale and size. However, this news represents part of the possible pipeline of projects which Boustead Projects may undertake in FY 2008, and provides a glimpse into what may possibly be new revenue streams coming from new territories. In short, there is much to look forward to in FY 2008 with regards to this division.

Geo-Spatial Technology Division

For this division, I frankly do not anticipate much growth as such technology is only useful to probably government agencies and statisticians or map readers. Assuming the government does make more use of this technology, I still do not see much revenue growth beyond FY 2008. It can probably remain as a good cash cow division contributing cash, but has limited potential for growth in my opinion. Other competing technologies may also erode the margins and revenue growth for ESRI in the near future. My suggestion will be to sell off this division if it continues to show signs of slow or flat growth, and to focus on the other 3 core businesses.

My review of the Balance Sheet, Income Statement, Cash Flow Statement and Notes will follow tomorrow in Part 2.


fishman said...

Hi musicwhiz, thanks for sharing so much of your homework with all of us. It's really very generous of you!

Frankly though, I'm quite confused by what I just read. For I really find understanding and analysizing business prospects daunting and scary. And the fact that there are so many new terms etc.

Especially for a company of Boustead's business environment, which is from what I gather from reading your post, is on engineering. So it's not something I can see and examine up close.

As you know I'm about to embark on starting on my value investing journey, think after reading your post, I'm all the more convinced to sticking with businesses which I'm more familiar at the moment, such as retail and property.

And thanks for dropping by my blog and sharing the wonderful article on value investing. Most appreciated!

musicwhiz said...

Hi fishman,

I can understand your apprehension. When I first started out, I was asking about terms such as Cum-Dividend and Cum-Bonus and basically struggling to understand how these concepts tied in with stock prices. I had a pretty steep learning curve though, and was careful not to plonk all my $ in as I had just started on my investment mistakes journey ! So I managed to avoid many of the mistakes which plague today's younger investing community.

Let me say that for Boustead, I invest base on their 5-year track record and for the Chairman's vision and ability to turn businesses around. Mr. FF Wong has quite a reputation for turning QAF around when he was CEO there. Of course, the technical aspects of the business are not easily understood by the laymen, but the Annual Report does explain everything in simple terms and avoids using confusing or misleading jargon. As Buffett says, if Management makes the report hard to understand, it means they do NOT want you to understand it (for whatever reasons) !

It's fine to stick to something you are familiar with like retail or property, as defined by your circle of competence. Everyone has their own circle and you have to define it yourself; no one can tell you what you know or what you don't know.

It's my pleasure to share this info with everyone and thanks for visiting and supporting my blog too. :)