Saturday, August 25, 2007

Boustead – S$300 Million Contract to Build Township in Libya

Boustead has announced on the evening of August 22, 2007 that it had clinched its largest and most significant contract to date: that of building a township in Al Marj in Libya. The total value of this contract stands at S$300 million and will be jointly entered into by Boustead and their joint-venture partner General Construction and Building Company (GCBC), which is the largest construction company in Libya. According to the agreement, Boustead will own 65% of the joint venture and it plans to build 1,164 single-storey semi-detached houses. Boustead will be utilizing advanced technology in order to augment the township and ensure that it is equipped with state of the art technology coupled with a modern Arabic architectural façade.

With this contract (Boustead’s largest to date), Boustead’s order book expands to close to S$700 million, a record for the Group to date. This success can be attributed to the Group trimming off its “excess fats” in order to focus its competencies on three core business; that of engineering, water/wastewater treatment and industrial real estate solutions. By specializing and possessing a high level of quality, Boustead is able to clinch contracts which span the globe. This is their main competitive advantage and continues to help them to secure new customers (as announced on August 13, 2007 regarding the S$26 million engineering contracts) in locations all over the world.

According to Philip Securities’ latest report on Boustead, the analyst Lim Thian Koon mentions that he expects more projects coming up for Boustead. This is predicated on the fact that the Libyan government is embarking on a long-term project to construct 400,000 homes in the country within the next decade. Boustead, being the first Singapore company to design and build a new township in Libya, would have establish an early foothold and gain a first mover advantage when it comes to the design and construction of more houses in other parts of Libya. In addition, Salcon is also just completing the construction of the largest sewage treatment plant there; thus Boustead’s name should be firmly entrenched within the country. This makes it all the more likely that more projects will be clinched by Boustead in future.

As for the numbers, taking the Philips’ Securities report as a good guide, this S$300 million project will be 65% owned by Boustead, which means a total revenue of S$195 million recognized over 24 months. As at the date of announcement, there are about 7 months remaining for FY 2008. Thus, the project is assumed to be 7/24 (or about 30%) complete as at the end of FY 2008 and this amounts to S$58.5 million. Management has informed Philip Securities that the gross margin for the township stands at 15-20% (this is taken from the report and cannot be independently verified); therefore yielding a gross profit of about S$8.775 million (using 15% because of prudence). I assume net margin is only about 5% of revenue recognized, so net profit will be in the range of S$2.9 million. Although this does not seem very high, please note that it is computed using very conservative assumptions and that Boustead Projects + the engineering division still have a fat order book for FY 2008 waiting to be recognized.

The intangible benefits arising from this record contract are obvious: it shows that Boustead has the ability and capability to clinch multi-million dollar contracts by partnering with other parties, when it was previously assumed that such mega-projects may strain the Group’s ability to properly manage and handle. Another plus point is that the Group is trusted and well-respected in diverse areas of the world which Singapore companies seldom dare to venture into. This gives Boustead a competitive advantage as it means that it can tap on its expertise in property development and high-end engineering solutions to provide a unique offering similar to the one demonstrated in Libya. In time to come, it is highly likely that Boustead would be able to collaborate with other partners in order to clinch more mega-deals, as it continues to focus on its core competencies and sharpen its competitive edge. Barring unforeseen circumstances, I can already envision that FY 2008 will be another record year of revenues and profits for Boustead, making it their sixth consecutive year of revenue and profit growth.

Next Post: More on Swiber’s newly appointed VP of FSO operations as well as their successful inaugural bond issuance amounting to S$108.5 million to fund their fleet expansion. Stay tuned !


Anonymous said...

Hi I'm a newbie to value investing and find your web very informative. Thanks for sharing.

I often read about fair value of a share and based on this fair value ,a value investor would buy or sell the share.

How do you estimate a share's fair value and what in your opinion is the fair value of Swiber, Boustead and Pacific Andes? Thanks

musicwhiz said...

Hi there,

Thanks for visiting my blog, hope you continue to find my postings useful. :)

I would say that for value investing, we will talk about intrinsic value rather than fair value. This incorporates all known aspects of a business such as the industry, competitive landscape, prospects, outlook, management team, earnings, profit margins etc etc....Taken as a whole, we then compute an intrinsic value based on the PV of future cash inflows from the company. For me, I will usually assign a suitable PER for the company based on its growth prospects, as not all value investors use the same method.

For Swiber, Boustead and PAH, for me to estimate the fair (intrinsic) value would take quite some time + analysis as their businesses are complex to analyze fully. All I can say is that for Swiber and Boustead, a price below S$2 should give good margin of safety. For PAH, current prices still offer value. Of course, this is just my personal opinion, please do your own research into the companies as well. :)

Good luck !

Freshie said...

Hi, I'm a newbie to your blog but I find your analysis interesting and informative. On your point that establishing a good margin of safety for the price of Boustead and Swiber at below $2, question is how do you derive at this price? Are these shares overvalued at prevailing market price ? For someone with simple understanding of financial ratios and if one intend to scan and identify those stocks with potential value investing criteria, how would one go about doing it ?

Thanks and Regards

musicwhiz said...

Hi freshie,

If you check my previous analysis and postings for Swiber, I had mentioned that its intrinsic value was worth more than S$2.00 on more than several occasions. I had used conservative assumptions including management strategic vision and clarity on company goals in order to arrive at my conclusion. As such, all intrinsic value computations are subjective to a certain extent because of the element of uncertainty over the prospects and future cash flows of the company. For Boustead, the value of their contracts makes their order book swell to about S$650 million, which makes their forward PER very attractive. And I am not even counting in their 5-year track record and management expertise which would make their intrinsic value even higher.

The shares are not "over-valued" per se because the market may have its own way of pricing in growth. All I can say is that the market offers a value investor an opportunity to buy into a company at a "safe" price, meaning a decent margin of safety. If you perceive the value of the company to be S$2.00 but the market is offering it at S$1.00, then obviously you should buy it right ?

For screening through and identifying such companies, my research series does give some basic steps but it is not a "cure-all" formula. Much still depends on your circle of competence, understanding of business cycles and knowledge of financial analysis. I would suggest reading some good books on value investing such as The Intelligent Investor to start out. The journey will be long but it is interesting and rewarding; just remember to take your time and not rush into anything because patience is the key to successful value investing !

Good luck !