Friday, November 16, 2007

Boustead – 1H FY 2008 Financial Review and Analysis (Part 1)

On November 14, 2007, Boustead released a strong set of results for 1H FY 2008, with revenues for the half-year ended September 30, 2007 rising 47.6% to S$206.2 million from S$139.7 million a year ago. Net profit attributable to shareholders rose an impressive 227% from S$7.9 million to S$26 million, partly due to the fact that the comparison is done from a low base (lower 1H FY 2007 profits due to delayed recognition of certain contracts then). Earnings per share has risen 229% from 3.1 Singapore cents/share a year ago to 10.2 Singapore cents/share. A dividend of 3 cents per share (tax-exempt) was declared, which was 50% higher than the gross dividend in the previous corresponding period, and this will be paid out on December 18, 2007.

I will proceed here with my analysis and comments on Boustead using my usual two-part format as per Swiber. Comments are most welcome in order to share knowledge and enhance the understanding on the company and its prospects.

Income Statement Review

Gross profit had increased by 38.2% from S$43.8 million to S$60.6 million on the back of a 47.6% increase in revenues, which means that gross margins were slightly impacted. The reasons for this are not known but I could speculate that perhaps some of their more recent contracts yielded lower gross margins than anticipated; or that the sand issue may still be driving up costs for their industrial real-estate solutions division in the short-term. Gross margins stood at 29.3% for Sep 30, 2007 as compared to 31.4% for Sep 30, 2006. Of note is that net profits actually were boosted by a one-time gain of S$6.5 million on the sale of a leasehold property, thus adjusted net profit attributable to shareholders will be about S$19.5 million, as compared to S$7.9 million a year back. This still represents an impressive 146.8% increase in core earnings, and the reasons for this (from my observation) are that selling and distribution expenses have hardly increased (only 1.8%) while administrative expenses have increased by only 14.1%, much lower than the increase in gross profits and revenues. In fact, other operating expenses and finance costs actually posted a decrease year-on-year, and I attribute this to effective cost-control procedures put in place by the Group during the financial year. As a result, core earnings net margin stands at about 9.47% for Sep 30, 2007, as compared to last year’s 5.68%. This increase in earnings attributable to shareholders also came about as a result of Boustead increasing their stakes in Boustead Projects during the previous financial year.

Segmental Revenue Breakdown – Review and Analysis

As can be seen from the table above for breakdown of segmental revenue, the strongest growth came from Engineering Services which posted a 60.9% increase in revenue. Please refer to the table below for a further breakdown and analysis of the revenue contributions for Engineering Services. Geo-Spatial Technology saw modest growth of 4.5% year-on-year but Management has said that this division will post a slightly stronger 2H FY 2008 revenue performance. Moving forward, I believe the main growth drivers for Boustead will be for real estate and their expertise in the Energy-related engineering division.

It can be seen from the Table above that the strongest growth came from their industrial real-estate solutions division headed by Boustead Projects, posting a 76% increase in revenue from S$51.3 million to S$90.3 million . During the half-year ended Sep 30, 2007, Boustead Projects had announced no less than 5 medium to large contracts, one of which is the S$25 million contract to build the Newater facility at Bedok. Boustead Projects also serves international clients such as Panalpina and Berg Propulsion in the design and building of industrial real estate. This is not even taking into account the S$300 million Libyan Township project for which Boustead has a 65% stake in, and revenues and profits will only begin to flow in from 2H FY 2008. Management has guided that with the upturn in the construction industry, more projects should flow the way of Boustead Projects in the years ahead.

Following the recent surge in oil prices to a high of US$98.62 per barrel and the buoyant oil and gas market, this has also caused Boustead’s energy-related engineering division to post strong revenue growth of 36.6% to hit S$65.7 million for 1H FY 2008. Management has reiterated that they are in the process of negotiating several medium to large contracts for 2H FY 2008, and are very upbeat about the prospects for this division. As a shareholder, I hope to hear more good news from the Group in the months to come.

However, the water and wastewater division under Salcon is experiencing strong competition in a low barriers to entry industry, thus Management does not expect a turnaround by end FY 2008 as several deals which are in negotiation have been delayed. The reason for the 113.3% increase in revenue was mainly due to order backlogs from FY 2007 and because of the comparison using a low base for 1H FY 2007. Mr. FF Wong had mentioned during the AGM that wastewater projects in China had very low margins and were highly competitive, with the best bid going to the company (usually local) wit the best technology. Thus, the Group will continue to work on current R&D initiatives and implement new technologies to enable Salcon to gain a better competitive edge when bidding for projects.

Balance Sheet Review

Boustead’s balance sheet has traditionally been very strong, and this time it is no exception. Their cash hoard has increased further from S$119.4 million to S$127.5 million for 1H FY 2008, despite paying a record final gross dividend of 4.5 cents per share (less 18% tax). Trade receivables and trade payables had increased in line with the increase in business activities, and costs on uncompleted contracts also rose from S$4.2 million to S$15 million in line with the increase in business activities for the Group. Current ratio stands at a healthy 1.7 for Sep 30, 2007 as compared to 1.82 for March 31, 2007, which is still very healthy. The Group has only S$7.6 million in inventories, thus their quick ratio will not be affected much either. Total borrowings also remained relatively constant and this is a good sign that the Group is relying on internally generated cash inflows to fund their operations expansion instead of resorting to debt.

I will continue with the review of the Cash Flow Statement and prospects and outlook for the Group in Part 2 to be posted in due course.

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