Boustead - 1H FY 2009 Financial Review and Analysis

Boustead had released their 1H FY 2009 results on November 14, 2008. At first glance, it looked as if the Group had done quite terribly, as net profit due to shareholders was down 41.6% for 1H 2009 compared with 1H 2008. On closer inspection however, it seems that the reason for the apparent decline was because of exceptionals which had been recognized in 1H 2008. Stripping this out, net profit attributable to shareholders would have increased by 30.2% for 1H 2009 to S$15.2 million, implying that core net profit for 1H 2008 stood at S$11.7 million. More will be elaborated on in the following sections.

Profit and Loss Analysis (Note: All numbers used are for 1H 2009 and 1H 2008, not 2Q 2009 and 2Q 2008)

Revenues increased very slightly from S$206.2 million to S$210.5 million, up 2.1%. The good news is that cost of goods sold fell 0.8% in the same period, thus Boustead saw its 1H 2009 gross profit margin improve to 31.4% from 29.4% in the previous corresponding period. Other operating income fell 64.1% due to the absence of exceptionals in 1H 2008 (gain on disposal of assets held for sale). In addition, there was also a gain of S$6.1 million from the sale of a leasehold property and S$1.9 million in a tax write-back. Stripping all these out, net profit attributable to shareholders would have increased 30.2% as mentioned above. Net margin based on net attributable core net profit is 7.2% for 1H 2009, versus just 5.6% for 1H 2008.

Administrative expenses increased quite a bit, by 29% mainly due to increased head count. FF Wong had mentioned before in interviews that the main problem with getting more contracts of higher value was to attract suitable talent to be in charge of such projects. As a result, the Company has gone on a recruitment drive to bring in people of caliber to oversee these new projects. This would explain the increase in head count, which may also herald more projects in future as the Group now has the human resource to manage such projects which are of a larger scale.

Financing costs were also somewhat higher at S$851K, though the magnitude of the increase is dwarfed by the % increase. I suspect this could be due to short-term project financing using bank loans, of which rates have risen due to the high LIBOR rates as a result of the credit crunch. This is a short-term phenomenon which is unlikely to persist.

An interim dividend of 1.5 cents per share was declared and is payable on December 18, 2008. At today’s closing price of 66 cents (November 18, 2008 when this analysis was done), this represents a dividend yield of 2.27%.

Balance Sheet Review

Trade receivables have increased slightly from S$98 million to S$111 million, probably also a result of the ongoing credit crisis which makes payments from debtors slower. It could also be a result of progress billings which have yet to be collected as Boustead takes on more higher-value contracts. Properties held for sale has increased by about S$7.4 million as Boustead had announced purchasing a S$6.7 million property in the UK, most likely for investment purposes. Contract work-in-progress nearly doubled to S$24.1 million from six months ago, which demonstrates that the Group had started on more projects as announced in their press release.

Current ratio stood at 1.58 for Sep 30, 2008, compared to 1.68 for 1H 2008. This was mainly due to the decrease in cash of 21.4% from S$165.3 million to S$129.9 million (to be elaborated on further in the Cash Flow Statement review). It was partially offset by the increase in trade receivables and contract work-in-progress, resulting in current assets increasing to S$328.6 million. Current liabilities had increased to S$207.8 million due mainly to the increase in trade and other payables to S$174.2 million.

Cash Flow Statement Analysis (Note: numbers used are for 1H 2009 and 1H 2008)

Cash inflows from operating activities was just S$1.5 million for 1H 2009, compared to a very healthy S$18.7 million for 1H 2008. There are several reasons for this: lower net profit recognized during the period, an increase in work in progress implying cash outflows, an increase in receivables and also an increase in properties held for sale. All these are considered negative working capital and are cash outflows. This was partially mitigated by the increase in trade payables, while payment of income taxes came up to a hefty S$9.5 million (S$8.7 million for 1H 2008 even though net profit was higher). This was probably due to non-deductible items in the Group’s tax computation for 1H 2009.

Cash flows from investing activities decreased by S$13.3 million for 1H 2009, compared to just S$1.6 million for 1H 2008. This was attributable to the following: purchase of additional stake in GBI Realty thereby increasing Boustead’s ownership from 30% to 40% (this cost them S$3.4 million), a loan to associated company worth S$6.3 million as well as purchase of fixed assets worth S$8.7 million. Though 1H 2008 saw purchases of fixed assets hitting S$9.5 million, this was offset by a one-off cash inflow from the disposal of assets held for sale of S$10.2 million.

Cash outflows from financing activities was mainly due to the payment of the final dividend of S$18.1 million. Other than this, there was some repayment of bank loans amounting to about S$2.5 million. The net result was a net decrease in cash or 1H 2009 of S$33.9 million, with Boustead having an ending cash balance of S$127.4 million.

The project nature of most of their contracts means that cash inflows can be lumpy, and the increase in contract work in progress should be testament to that. For 2H 2009, the sale of property by GBI Realty of S$200 million will put more cash into the Company, and more operating cash inflows are expected in 2H 2009 as well with the commencement of the Libyan wastewater project (for Salcon) and the Al Marj Project as well (for Boustead Infrastructures).

Analysis of Revenues by Business Division

Please see Tables 1 and 2 below for more details and remarks:-


Discussion of Prospects (by Division) and Future Outlook

For the energy-related engineering division, I would expect contract flow to slow considerably as oil and gas prices have slumped from a high of US$147 per barrel to just US$54 per barrel as of this writing. This would affect their downstream and upstream oil and gas services as the Company reported that growth may be moderated.

For Salcon, Mr. FF Wong had in an earlier interview mentioned that a new R&D initiative was being tested in a Chinese textile company, but there was no news of whether the technology is effective and can give the company a sustainable competitive advantage. It will be good if Management (including CEO Mr. Yeo Ker Kuang) can update shareholders on the progress of this initiative, as it could mean that Salcon would be able to make use of the technology to scale up its earnings and margins. Lagan Construction had also filed a claim against Salcon but this is not expected to be material and would not impact FY 2009 results too much.

For the real estate division, it would be good if Boustead Projects can keep the contracts flowing into FY 2010 as well. The last contract announcement for this division was on July 9, 2008 for a S$67 million contract to design a semi-conductor facility. It has been more than 4 months without news of any contracts being clinched. This could be partly due to their order books being full and the division being unable to take on further projects. If you note for FY 2008, the 3Q 2008 (Oct to Dec 2007 period) also saw no contracts being announced for Boustead Projects. Contracts only began flowing in rapidly from March 2008 onwards (close to tail end of FY 2008 and beginning of FY 2009). Thus, I believe contract flow should resume by late FY 2009 when their current order books are depleted, but it is hoped that the Group can take on more projects in order to grow this division further, instead of being constrained by capacity. With the increase in head count, it is hoped that they will be better equipped for larger and more complex projects. The press release was deliberately vague on the prospects for real estate but with the current credit crisis affecting the property market as well, I believe Boustead should experience a slowdown in contract flow. However, their reputation as a specialist contractor and their niche focus on high-end industrial buildings with state of the art technology and facilities should give them an edge.

Also note that the Al Marj project under Boustead Infrastructures Pte Ltd is proceeding, albeit slowly. More revenues are expected to be recognized in 2H FY 2009 as well as FY 2010. Boustead has taken a 65% stake in this project which is worth S$300 million.

Geo-Spatial technology is expected to continue to receive firm demand but the weakening of the AUD will have some impact on profits moving forward. Still, this division is a cash cow and Boustead should hold on tightly to it for the long-term as growth is slow but steady.

In light of the continuing financial and economic crisis, this has thrown up juicy opportunities for Boustead to consider as potential M&A targets. Management is actively seeking out potential candidates and had already rejected one during their FY 2008 announcement as it was deemed not attractive enough (even though S$1 million was spent on the due diligence !). I am hopeful that the Group can source for an eventually find a worthwhile investment target which will match the stringent criteria set by Mr. FF Wong.

The Group is in a net cash position and has a healthy order book as well as operating cash inflows. Based on the above, I am confident the Group can deliver a strong FY 2009 come results announcement in May 2009, and I am also expecting a decent final dividend to boot.

Note: There will be NO detailed analysis for 3Q 2009 results, unless there are material developments within the company which are worth discussing or mentioning.