Sunday, July 29, 2007

Boustead – Annual Report FY 2007 Review Part 2

Dear readers, this is a continuation of my review on Boustead’s Annual Report. Please see the sections below and feel free to comment:-

Income Statement

As can be seen, revenues had increased by 18.9% but COGS has increased by 25.8%, mainly due to the aforementioned increase in costs due to the sand ban for Boustead Projects. As a result, Gross Profit only increased by 7.5% and the Gross Profit Margin dipped from 37.7% in FY 2006 to 34% in FY 2007. It is hoped that the increase in COGS is only a one-time non-recurring issue and that margins will improve for FY 2008.

A quick glance also reveals that administrative expenses had increased by 47.2%, which is rather excessive when compared against the increase in revenues. This resulted in almost flat profit before tax (no growth) and would have been a very disappointing set of results if not for the lower proportion of minority interests factored in, which made profit attributable to shareholders jump 41.6%. Overall, it was only a mediocre set of results and Boustead are in danger of stagnating in terms of growth if they do not pick up the pace for FY 2008.

Balance Sheet

Current ratio is 1.82 in FY 2007 against 1.92 for FY 2006. Quick ratio is 1.69 for FY 2007, also lower than FY 2006’s 1.75. This was mainly due to a decrease in liquid assets as a proportion of current liabilities. The debt equity ratio decreased from 15.6% in FY 2006 to 13.3% in FY 2007, as the Group had taken up slightly more short and long-term loans to fund their operations and buy up stakes from minority interests.

Cash Flow Statement

Cash flows from operations was lower by S$15 million mainly due to increases in receivables as well as inventories. This was partially offset by an increase in payables, which implied that the Group took longer to pay off creditors as compared to FY 2006. For Investing Activities, a lot of cash (to the tune of S$25.4 million) was used in acquiring stakes in companies currently held by minority interests, which is a good way of enhancing shareholder value. As a result, there was a net cash outflow of S$23.3 million for FY 2007 as compared to a net cash inflow of S$3.5 million for FY 2006. Financing cash flows were negative as well but improved somewhat as FY 2006 saw them using cash from operations to pay off short-term bank loans of S$17.8 million. Fixed deposits pledged had also decreased, which freed up more cash; thus the outflow lessened from S$17.4 million to S$2.9 million. Boustead is still in a strong net cash position in spite of the outflows, as their operations had managed to generate enough cash to fuel the operations. They are preparing to pay for a S$9.41 million final dividend, which is only 7.9% of their FY 2007 cash and bank balance.

Notes to the Accounts

Note 2 Page 52 – For construction contracts, note that the % of completion method is being used, thus matching the revenues earned from a project to its construction costs.

Note 2 Page 54 – Borrowing costs are capitalized till the asset is ready for use. Any investment income from such borrowings will be used to offset the borrowing costs and reduced the amount of capitalization. Thus, this has no immediate effect on the Income Statement and has a deferred impact as long as the asset has not completed construction.

Note 6 Page 59 – For cash and bank balances, S$93.6 million was placed in fixed deposits of less than 3 months maturity. However, interest rates for FY 2007 only ranged from 2.1% to 6.2% as compared to 1.75% to 8.5% for FY 2006. Thus, the lower rates sort of offset the higher deposit amounts. It is hoped that Management can find a good use for this cash hoard, otherwise it might be better to return it to shareholders in the form of a dividend.

Note 7 Page 60 – Trade receivables had increased by 51.8% as compared to revenues increasing only 18.9%. Does this imply a collectibility problem ? An allowance of S$802K was made based on past experience but is this sufficient ? On the surface, it looks like the Group’s cash conversion cycle has lengthened considerably.

Note 11 Page 62 – Properties Held for Sale. The book value of these properties is S$3.26 million and there are 4 properties which are located in China, Wuxi Jiangsu province. The total gross floor area of these properties is 19,977 square metres. It is hoped that Management will be able to realize a good gain over book value for these properties.

Note 20 Pages 71-75 – Investment in Subsidiaries. One can notice that the Group has increased their stake in Boustead Projects Pte Ltd from 55% to 91.7%, as well as increasing their stake in Salcon Pte Ltd from 80.9% to 100% (wholly-owned). This is a good move as these two companies represent the divisions of Industrial Real Estate Solutions and Water and Wastewater Management respectively and are the two fastest growing segments. Increasing their stake means more of their profits will flow to shareholders of the company, instead of to minority interests.

Note 24 Page 79 – Trade and Other Payables has increased from S$78 million to S$103 million. One item, accruals, stands out as it has increased more than 100% from S$17.4 million to S$38.4 million. It will be good if Management can explain why there was such a large increase in accruals; what exactly were the accruals for ?

Note 28 Page 81 – Other Operating Income consists of S$7.2 million worth of gain on disposal of available-for-sale investments, which is a one-time non-recurring gain. If this gain is removed in the computation of net profit, then net profit after tax for the Group would have fallen instead of risen, but net profit attributable to shareholders would still be higher than FY 2006 at S$28 million (versus S$24.9 million).

Note 39 Page 89 – Events After Balance Sheet Date. Note that on May 8, 2007 (i.e. FY 2008), the company’s subsidiary Opelika Holdings Ltd sold a leasehold property for a consideration of 3.3 million pounds. As a result, the Group will record a gain on sale of investment property of S$6.3 million.

I await more news from the Group on its upcoming projects. The AGM will be held tomorrow and hopefully the chairman can shed more light on what the Group is planning to do and what strategic moves it is undertaking. There is also the nagging question of when approval can be given for the Dinh Binh power station project in Vietnam which is worth a cool US$500 million. Updates should also hopefully be given for Salcon’s role in the Water Solutions Alliance, and whether Boustead Projects have any upcoming projects bidded for.


Kelvin said...

Hi Musicwhiz

Thks for sharing ur analysis. It is good! Did you attend the AGM? Can share what is being said during the AGM? There is a guy that is with Boustead doing the IR and he is quite friendly to small investor. If u are interested can also email and ask him Qs. I think Boustead can worth more if it split up its various units through IPO....What do u think?

musicwhiz said...

Hi Kelvin,

Yes, I did attend the AGM and will be posting on it this evening. Stay tuned !

P.S. - I am not sure if it is really worth more that way, if you are talking about Salcon doing an IPO. Maybe I will explore that one day through a separate post.