Boustead FY 2008 Results Audiocast Transcript Part 1

Boustead released their FY 2008 financials yesterday May 28, 2008. To celebrate their 180th Anniversary, the Company had launched an audiocast for their latest financial results, which saw the company achieving their 6th consecutive year of record revenues and profits. Net profit attributable to shareholders rose 46% to S$51.5 million, and the company declared a final dividend of 5 cents per share and a special dividend of 2 cents per share. I shall be reviewing and posting my views on Boustead's results in a later post; instead now I present Part 1 of the transcript of Boustead's audiocast.

Note that this is typed out entirely based on my listening to the audiocast, and some parts are re-phrased accordingly to capture the essence of what was said. I think FF Wong and KK Loh tackled many questions on the future of the company and the direction it's going to take in 3 to 5 years time. Also note that I have NOT typed out the section for Mr. Keith Chu presenting the Powerpoint Slides as I think that is largely self-explanatory in the given attachment on SGXNet and does not add much value. There are almost 6 full pages of text which I had typed out based on the audiocast; Part 1 will present about 3 pages and Part 2 will showcase the rest of it.

Question: Notwithstanding inflationary pressures, you have controlled costs very effectively. May I know what’s your strategy and is this sustainable moving forward ?

FF Wong: Obviously, you all realize that raw materials escalation has been going on for some time. It has always been our practice (before signing a contract), we ensure the commitment is back-to-back with respect to our suppliers. It turns out that this is an effective way to control our margins and to prevent material price increases/escalations. With respect to labour and wages, we have been under pressure as well. In that regard, I have been stressing time and time again; we have a very effective profit-sharing formula in all our subsidiaries and business sectors. We are paying very good bonuses to our staff. In the case of Boustead Projects, most will be paid 7 to 12 months bonus this year.

Question: There is a recovery for margins from 29% in 1H 2008 to 32% in 2H 2008, would this trend be sustainable going forward ?

FF Wong: I would expect so. Based on our budget (FY 2009), we will do even better.

Question: Moving into FY 2009, how do you see Salcon performing ?

FF Wong: I have been very disappointed with Salcon’s performance so far. We had promised the market that we would turnaround this division in FY 2008 but this did not happen principally because of two unfortunate situations. One of these was in Philippines (a project with the Philippine-Manila government) where Boustead got involved in a political tussle between two factions. As a result, they refused to pay us even though this was financed by ADB (Asian Development Bank). So, we took them to court and we expect to win this legal case as there is no reason why they should not pay us. In any case, we were severely affected by them. The other case was another contract where we suffered from unforeseen circumstances; one of these was unexpected rainfall (bad weather) and the project was delayed; while the soil conditions were not what we expected and presented to us. We believe we can claim against the client but based on prudent accounting practices we would need to make provisions first. But moving into FY 2009, we have secured a lot more projects than before and these are the projects without installation or sewer works. Our competence in Salcon rests on water treatment and mechanical expertise. Without having to rely on civil works, we believe we will be able to manage and control the costs much better. The other positive aspect will be from Middle East; we do expect sizeable projects to be concluded in FY 2009 but we are not ready to make announcements yet.

Question: Is it possible to know the extent of losses at your water segment for FY 2008 versus FY 2007 ?

FF Wong: I can tell you that for FY 2008, losses amounted to S$14.8 million against losses of S$7.7 million for FY 2007. Bear in mind that for both financial years, there was a huge provision for closing down Salcon in UK. The figures may look big but they are not quite meaningful as such.

Question: With respect to your Energy related business revenue (up 5% to S$137 million), with high oil prices and in view of delayed negotiations, how much growth would you expect in the coming years ?

FF Wong: That’s a difficult question. With high energy prices, we do expect this division to continue to grow. As what Keith Chu just presented, with high material prices and tight capacity (referring to labour shortage), most of the large oil majors have decided to delay their projects somewhat; hence you can see that there was a dip in order book but I can assure you that they are not dead. Negotiations are still continuing, it’s just very frustrating that we cannot conclude them. Boustead is pushing up prices and we are trying to pass on the (higher) steel, outsourcing and equipment prices onto the client. Every time we revise that, it sets them thinking and further delays the project. There will be growth but as to the extent of it, it is very difficult for me to project at this point in time.

Question: The water and wastewater division has constantly under-performed over the past 4 financial years, causing the Group much financial losses. While it seems to be an exciting industry, revenue is only S$36 million so far. How much scope is there for growth and are the margins for water projects enough for Boustead’s project parameters ?

FF Wong: As I have said in the past, water and wastewater is a highly competitive business. If you look the industry as a whole, I do not think there are many companies reporting tremendous profit as yet (meaning they have not lived up to market expectations). It is only exciting because (I think) the press was responsible for exciting the public; fundamentally there are huge prospects in China. But this is a market with low relatively low barriers to entry; hence the unexciting margins. Our strategy is to move up the ladder in terms of technology. We have spent a good deal of money in R&D and have put up a commercial scale pilot plant in China to treat industrial waste (textile waste in this case) but we cannot conclusively say that it is working or that it is working to our expectations. We will need a couple more months to ascertain that this technology works. If it works, we will be able to scale up the business and we will have an answer to our competitive disadvantage at this moment. Once we have proven we are able to compete effectively, the margin obviously is better than having to compete in BOT for waste treatment plants. That will be our answer in particular for China. Once we are successful in China, we will scale up and offer our services and technology in other parts of the world (in particular India). This technology has the potential be very big and we are already in negotiations with some of the big industrialists in China but this is subject to our successful conclusion that this technology will work. Hence, I will say that there is big potential. In the wastewater arena with many competitors using low technology, there is not much money to be made.

Question: Remember in FY 2007’s results presentation, Mr. Wong you mentioned that if there was no major capex in FY 2008, you would be looking to pay out a lot more of the cash. Would you share your current thoughts on this ?

FF Wong: We are paying a fair bit more. In FY 2007, we paid 6.5 cents per share dividend. In FY 2008, we have upped the dividend by 3.5 cents (50+%) per share to 10 cents per share in total. So we are paying 50% more than the previous year. Are you happy with it ? I am quite happy with it (side note: FF Wong owns more than 30% of the company). Obviously, you do notice that we have a lot of cash of S$150 million. We have been looking at various synergistic acquisitions. We nearly concluded one acquisition in the oil and gas sector but unfortunately they did not live up to our scrutiny. In fact, we spent nearly S$1 million on the due diligence. We are looking at a number of investments in the region which would transform the company into a much stronger company. Other than ESRI (geo-spatial) of which about 60% of the revenue is recurring, most of our businesses are on a project basis. It is our intention to look for acquisitions which are able to generate recurring income to balance out the current business model in which most of our revenues are project-based.

Question: With a net cash position of S$150 million, how does the Management look to utilize this cash ?

FF Wong: Most of our revenue is not recurring, so we are looking for a synergistic acquisition or investment to generate recurring income to balance out our project-to-project income.

Question: What kind of M&A targets would Management be looking at ?

FF Wong: We are looking at synergistic M&A possibilities. We nearly concluded one earlier on but unfortunately, after spending S$1 million on due diligence, we decided to back out as it did not live up to our expectations.

Question: Regarding the Libyan township project, when will the project be completed, the booking of the revenue in terms of FY 2009 and beyond. Also, with the township development in its infancy stage in Libya, what are the chances of securing more projects ?

FF Wong: This current township project – contractually we are supposed to complete it within 2 years. Based on our experience in Malaysia, we could actually have it completed in 1.5 years. Unfortunately, there has been some delay as we need to thrash out some of the differences with the client’s consultants. This is obviously a learning curve for us. The consultant’s engineering practices and standards are very different from ours and there are also cultural differences which we need to overcome. We have just gone through that and resolved all the differences. In any case, we are about to kick off the project after 4 months of delay. Assuming no other differences, we should be able to wrap up construction activities within 2 years and we are expecting significant contribution from this project in FY 2009 and FY 2010. We have been promised, once we have been able to move this project, there will be a lot more to come. However, we will take this project one at a time and make some good profit before we consider pitching for another one.

Stayed tuned for Part 2 !