Sunday, September 16, 2007

Boustead – Thoughts on Interview with F.F. Wong in The Edge Singapore

This week’s issue of The Edge Singapore featured a two-page detailed write-up on Boustead regarding their recent record contract win in Libya. Mr. F. F. Wong (Mr. Wong) was interviewed and he details his strategy of why he avoids China and concentrates on the Middle East instead for more projects and contracts. I will present this post as such: summaries will be provided on various key sections of the article, and my comments and opinions will follow in italics.

On working hard - The first part of the article talks about Mr. Wong flying to various far-flung locations of the globe in order to discuss about prospects and trying to snare more contracts. Comment: Mr. Wong strikes me as a CEO who is very hardworking and hands-on. His strategy is to sell off Boustead’s non-core businesses and focus the Group’s strengths, thus yielding strong results for the Group and benefiting shareholders as well.

On Expertise and the S$300 million Libyan Project – Mr. Wong believes that Boustead has the expertise to handle housing developments as his own private company built 80,000 housing units in Malaysia over the last 25 years. Thus, he believes that the knowledge and expertise can be distilled into Boustead Projects, thus the Libyan township project should not be a problem. Also, the deal is partly lump sum and partly cost plus; cost plus ensures that a margin will always exist for the project in case of delays or unanticipated problems. Comment: Mr. Wong is making use of his knowledge in housing development to push Boustead towards this direction; and the Group’s Libyan and Middle East connections over the years have paved the way for them to comfortably manage large scale water/wastewater projects as well as township projects. The structure of the deal also acts as a safety cushion for Boustead in case of any cost overruns, as cost plus always ensures a margin for the developer(s). The co-operation with Surbana was also a brilliant move as Surbana was in charge of planning, designing and developing 26 HDB new towns in Singapore.

On Potential of Middle East and Challenges in China – Mr. Wong views the Libyan township deal as more of a one-off occurrence for the Group, but analysts feel that this may signal the start of many more lucrative contracts for the Group in years to come, even if it may not be in the arena of new township development. Doing business in the Middle East is more favourable than in China, where conditions were described as “brutal” by Mr. Wong. EPC (engineering, procurement and construction) model is used in the Middle East while BOT (build operate transfer) is used in China. For the Middle East, he says the playing field is more level (as compared to China where political “connections” are viewed as being more important), but the only problem is that Boustead is not viewed as a “big-league” player as it has a paid-up capital of S$153 million and a market capitalization of only S$598 million. Thus, contracts which are of higher value may not be readily available to the company even though they have demonstrated that they can deliver projects on schedule as the mega projects are awarded to companies which have in excess of US$1 billion in revenues. Comment: I concur with Mr. Wong in that doing business in China can be harsh and a lot of “guanxi” is involved as well. Even though lots of people are bullish on China’s market as the middle class is expanding, purchasing power is increasing and their economy is booming (buoyed by the upcoming 2008 Beijing Olympics), I have my reservations regarding Chinese companies as the competition is very stiff and margins can be very poor for water projects (single-digit as stated by Mr. Wong, unless you have superior state of the art technology). Laws are also not strictly enforced as the lower class are struggling to survive and eke out a living, in flagrant disregard for laws. There have been many cases of illegal coal mining and other “atrocities” committed just to boost production or cut costs (with the Mattel toy recall, things seem to be spiraling downwards for China). Thus, I am personally pleased that Boustead is not going the China direction, but instead setting their sights on North Africa and the Middle East.

On Salcon and potential water projects – Salcon’s entry into the Middle East was spearheaded by IE Singapore and it forms part of a consortium which can bid for higher value projects. Thus far, there has been no progress on the bidding for large projects as there have been delays (refer to Boustead’s AGM post) but the company is still trying for smaller projects. The company has completed well over 50 membrane filtration projects (with the biggest one for a refinery in Doha, Qatar) and the size of each project is around S$10 to S$15 million. Comment: The IE Singapore consortium has yet to break significant ground in terms of bidding successfully for a mega-scale water project in the Middle East, but there is room for optimism as Boustead itself has cracked part of the market there already with its demonstrated expertise. Although Salcon under-performed expectations in FY 2007, there is reason for optimism as it is still uniquely positioned as one of the world’s leading wastewater specialist, and it can use that competitive advantage to bid for other projects too. Thus far for FY 2008, there have been no announcements of water projects by Salcon, yet Boustead’s book order is already at a record high of S$650 million. Any water-related project announcements would therefore be an added bonus for the company which will further swell their order book.

On Staffing and Human Resource – Mr. Wong is cautious about the rate of growth of Boustead, due in part to the lack of skilled personnel in specialized fields to manage projects for the Group. His opinion is that there is no lack of projects in upcoming months to keep the Group’s order book filled; the problem lies with finding enough competent personnel to helm these projects. Comment: Human resource is a critical aspect of any business and I am confident Boustead will be able to recruit the requisite talent in order to man the new projects. Recall too that Swiber regularly announces important management appointments in order to emphasize the significance of human resource in managing a business. Mr. Wong himself is a dedicated CEO who has shown himself to be a good turnaround specialist (with QAF), and all these factors make Boustead a strong company to invest in for the long term.

The article basically outlines the potential for the Boustead Group to benefit from more projects in the Middle East, as also mentioned in the Phillips report on Boustead. With a good cash hoard, I will be looking forward to the Group making acquisitions (to better utilize the cash) as I believe Mr. Wong knows how to look for high IRR yielding projects and companies. This is preferable to the cash being returned to shareholders via a dividend, as long as the company demonstrates effectiveness in channeling excess cash to projects with a good rate of return. There is also a problem with the liquidity of the shares, as they are tightly held by majority shareholders (Mr. Wong himself holds around a 30% stake), and a possible share split may improve liquidity of the shares and attract institutional interest. Given time, I am optimistic that Boustead will be able to grow steadily (20-25%) year on year for the next 5 years.

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