Boustead FY 2008 Results Audiocast Transcript Part 2

Here it is, the continuation of the audiocast from Part 1. Enjoy ! I shall be doing my review and analysis of Boustead's FY 2008 results and prospects in a later post.

Question: Would Management be able to update on the business conditions in Vietnam ? Given the high inflationary environment and monetary tightening, does Management forsee a slowdown in projects being handed out ?

FF Wong: We were not very active in Vietnam in the past. We have done some small projects in Vietnam in the real estate solutions arena. However, we are very positive and bullish on Vietnam and have stepped up efforts. We have been negotiating with various Vietnamese Government Agencies on projects. I consider their current problems to be temporary. The very fact that they have problems creates windows of opportunities for us; in the last couple of years the market has been too “hot”. Of course, one has to be careful of environments where there is hyper-inflation, but then again in most cases where crisis abounds, opportunities also abound.

Question: Would Management be able to update on the hydro-power project in Vietnam ?

FF Wong: We signed the MOU like 2 years ago. That is only an MOU but we did not manage to go any further. There were far too many problems or missing pieces that we cannot put together. Having said that, we are not saying that we are not going to look at it, but we did not go any further.

Question: How many industrial real estate solutions are on the books and what are the book cost of these assets and their estimated market value ?

KK Loh: Currently, there are 3 industrial properties recorded on our Balance Sheet, with a total book value of S$29 million; one of which is still a work-in-progress. Earlier on, we were treating this as an investment in properties, thus there is no requirement for revaluation. Valuation was just to ensure that there was no impairment. In recent years, because of the buoyant property market, there was no danger of impairment but we have not obtained the market value of these 3 properties.

Question: Can you give us an outlook for all the business segments ? Do you see the securing of orders slowing down ?

FF Wong (very long reply): I would start with Geo-Spatial. This division has been enjoying steady growth, not exciting, about 5-15% in the past. I envisage we will continue to grow at that pace. We are making efforts to synergize the business with the rest of the group; like for instance water management utilizing geo-spatial technology. We are working with PUB to try to come up with a consortium to market our expertise in the Middle East and the surrounding region. But that’s going to take time, hence I expect this business to continue to grow as before.

On Energy related business, with high energy prices, I do not forsee there would be negative impact even if oil prices were to retreat back to US$60-US$80 per barrel. In this area, we should continue to enjoy fairly healthy growth for another 5 years or so. At least in the next 2-3 years, I do not forsee any problem.

For water and wastewater, this has been a big disappointment for us. It’s because, as I said earlier, the competition had caught up especially in China. Hence, we are trying to move up the technology ladder. We hope that we are able to successfully prove ourselves in this area and move in a big way in China. It’s a very competitive market and I am sure you have followed this market and some of our fellow competitors in this area. I frankly do not think there are many star performers in this area. However, having been in this business for a long time, we know exactly where we can compete and we have been able to move into certain niche areas where we have high barriers to entry. For instance, we are well-recognized and accepted by large EPC MNCs such as Japan Gasoline, Toshiba (newly-added on), Hyundai, Mitsubishi and the like. Our competitors in this area will be the Japanese and the Europeans. You may ask why we have not grown that much; this is a matter of focus. In the area of sewage treatment in China, it’s absolutely a very competitive marketplace; certainly not on BOT. For BOT, we are in essence buying a project instead of getting paid for our services. We are also moving away from Europe where we had lost a lot of money. Now, we are focusing on areas where we have strength. Of course, volume has gone down but if we are successful in the technology initiative (it would yield rewards). We are not only developing new technologies with universities, we are also looking at acquiring, purchasing or signing up licenses with various people who have the state-of-the-art technology which can complement our products and services.

For real estate solutions, our main profit comes from Singapore and we do expect that we can replicate the same winning formula in China and Vietnam. For Singapore, the property market has been doing very well. Residential is cooling down, commercial seems to be holding up while industrial property is buoyant. We have a very healthy pipeline and are negotiating with some big names (MNCs) for rather large projects (much bigger than previously seen). We hope that some of these projects can be design-build-leaseback, meaning we own part of the investment as well. Over the years, we have been able to accumulate quite a number of these leaseback projects which we were then able to on-sell to the REITS. There seems to be still a lot more in the marketplace for design and leaseback; thus we are very bullish about FY 2009. As usual, we will not give a forecast for FY 2010 due to the nature of our business. There is too much of a project to project basis (to forecast accurately); with the money on hand we are looking to acquisitions or M&A where we have expertise to generate recurring income to lay a stronger foundation for the Group to move beyond my tenure and in the years well ahead of my time.

Question: Does the weak US dollar have any significant impact on your bottom line ?

FF Wong: In certain areas, yes while in others no. In Geo-Spatial, we are buying certain software from USA and the weak dollar will be beneficial for us. The negative part is for projects located in Middle East and North Africa. The denominated currency is usually the USD but these days they also accept Euro as well. We are hoping to sell a mixed bag of USD and Euro but this has been difficult. So far, our company has been able to insulate ourselves quite well by buying forward or by outsourcing in the currencies that we are also selling. Thus, we create a natural hedge and we have not been adversely affected yet and we hope to not be.

Question: Are there any intentions to sell any part of the Group with low growth ?

FF Wong: Well, actually (FF Wong is talking about) Geo-Spatial which has steady growth (but good cash flow – 90% of our customers are governments or government-related companies), I would say unless someone is willing to offer a price I cannot refuse, we will keep it for cash flows. We are working hard to synergize it within the Group. As I said earlier on, we are working hard to bring this technology to manage water resources and utilities. For the other divisions, if you care to look at our Balance Sheet, perhaps you will notice that for each business, we started with very little money but we have managed to create a brand name and build up expertise that we have managed to export to most parts of the world. If you recall, Boustead in its early days was bringing in technology from the West (in particular England). Today, we are selling technology and services to other parts of the world instead. The world is huge if you have it as your market. Of course, it is not easy to establish oneself but we have done projects in 73 countries around the world so far. The growth at this juncture should be considered at its infancy. Obviously, one constraint is being able to recruit younger and new talent to grow the company.

Question: If the Group needs to lever up for an acquisition, what kind of leverage ratio would Management be comfortable with given a suitable target ?

FF Wong: I am a very old-fashioned man, so borrowing money has always made me uneasy. However, if short-term financing is required for a project, I would certainly consider it. To take on leverage just to acquire does not make me comfortable.

Question: In terms of M&A, is there any possibility with half-brothers Boustead Malaysia and Salcon Malaysia ?

FF Wong: Well, why not actually ? They are not half-brother actually; we are the father while they are the son ! Certainly, if we are looking for synergies we will explore such options should the opportunity arise. We have no qualms or quarrel with anybody with regards to M&A or doing business.

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