Monday, June 15, 2009

Boustead – FY 2009 Financial Analysis and Review Part 1

Boustead released their full-year 2009 results on May 28, 2009 and the Group had achieved a seventh record year of revenues and profits. All divisions except water and wastewater showed growth and the Balance Sheet was further bolstered by a net cash balance of about S$150 million. In addition, for FY 2009, Boustead had also released the net profits for each division, which enables me to compute the net margin for each division. This information will be shown in Part 2 of the analysis. This analysis will be similar to the one I did for Tat Hong – Part 1 tackles the Profit & Loss, Balance Sheet and Cash Flow Statement; Part 2 discusses the divisions and how they performed while Part 3 shall cover future plans and prospects for the Company. There will be a separate post on the audiocast provided by Boustead for their FY 2009 results, which I will transcribe as I did for FY 2008.

Profit and Loss Analysis

Cost pressures can clearly be seen nibbling on Boustead’s performance, with 4Q 2009 COGS increasing 77% against a 53% increase in revenue year-on-year. For FY 2009, the effect was more muted, with an 18% increase in revenues to S$516.6 million offset by a higher increase in COGS of 24% to S$373.6 million. As a result, gross profit only increased 5.4% for FY 2009 to S$143 million. Note that part of the COGS included an S$8.7 million provision for foreseeable losses, or else the gross profit would have improved to S$151.7 million. For 4Q 2009, gross margin was 24.8% against 4Q 2008’s 35%, due to higher cost of materials. For FY 2009, gross margin hovered at 27.7%, lower than FY 2008’s gross margin of 31.0%. If we remove the one-time provision for foreseeable losses for FY 2009, gross margin would improve to 29.4%, which is just marginally lower than FY 2008.

For FY 2009, admin and selling and distribution expenses increased at a higher rate than revenues, up 36.6% and 34% respectively. This shows that Boustead still has some way to go to streamline their cost structure to ensure their operations remain lean and mean. On the other hand, “other operating expenses” only increased 7.2% which shows good cost control. If not for the S$24.2 million gain on sale of leasehold property completed by 40% owned BGI Realty during 4Q 2009, Boustead’s results would have been much poorer due to a combination of higher COGS, unfavourable forex movements, higher staff costs due to expansion of roles to handle a wider variety of projects and higher selling expenses.

Thus, it would be prudent not to expect such a performance from FY 2010 onwards, as the Company had already warned that it would not be able to sell any leasehold properties though it has been doing so for each of the last 5 years. Assuming Boustead can keep their costs under control, I would probably expect a 35-40% dip in profit attributable to shareholders for FY 2010, barring other unforeseen circumstances; and in the absence of any significant project wins or M&A announcements.

A final dividend of 2.5 cents per share was declared for FY 2009, bringing the total full-year dividend to 4 cents per share. Based on my purchase price of 55.8 cents, this represents a dividend yield of 7.2%, which easily beats inflation. The dividend is payable on August 20, 2009.

Balance Sheet Review

The point about Boustead which continues to impress me is their strong Balance Sheet, even if their Income Statement does look somewhat fragile and weak at the seams. With a cash balance of S$180 million (and more to come from the completion of the sale of leasehold property) and just debts of about S$30 million, the Company has a net cash reserve of S$150 million, which can comfortably cushion it against any adverse macro-economic headwinds. Contract work in progress has also tripled due to un-invoiced billings on the new Libyan Township business which will be billed in later periods (a timing difference). Other receivables and prepayments also increased as a result of the increase in business activities. The Group’s current ratio for FY 2009 stood at a healthy 1.66 against FY 2008’s 1.68. Quick ratio is virtually the same as current ratio as inventories made up just S$8 million of current assets of S$300 million+. The bulk of current assets comprise cash and receivables; and as at this point in time, Boustead has not indicated that there are collectability issues arising from any customers due to the economic downturn.

One thing to note is that Boustead’s long-term bank loans had jumped from S$8.7 million in FY 2008 to S$25 million in FY 2009, which I suspect is the result of borrowings to finance certain projects which have high initial capex requirements. Even though long-term loans has increased, Boustead’s net cash position is still very strong and is expected to improve once the remainder of the monies come in from the sale of their leasehold property.

Cash Flow Statement Analysis (using FY 2009 versus FY 2008)

Boustead has again demonstrated that it is able to generate very healthy operating cash inflows of S$43.9 million for FY 2009, though this was lower than FY 2008’s S$81.4 million. Free Cash Flow (Op cash flows less capex) stood at S$29.3 million for FY 2009 and is an indication that a lot of the cash generated is being ploughed back into the business to grow it, without the need for much external financing or heavy capital expenditures.

Cash used in investing activities amounted to a mere S$10 million in FY 2009, similar to FY 2008. For financing activities, the previously mentioned proceeds from bank loans helped to add S$19.8 million cash while this was offset by the payment of dividends of S$28.7 million. It’s good to note that for FY 2008, the bulk of cash outflows for financing activities comprised payment of dividends (S$18.8 million), so this is a true demonstration of how the Company is consistently returning cash back to its shareholders. With such a healthy cash position and cash flow, it is very likely that Boustead can continue to pay dividends twice per financial year, though the magnitude may be adjusted to reflect the current trying times.

For Part 2 of the analysis, I shall be touching on Boustead’s divisions and how they performed, as well as discussing something new to my analysis – the net margins achieved by each division.


JasonLim said...

Without much insight, simply a reflection of what was visibly clear in the financial announcement.

I suggest a chart inputs on share price movement and ratios.

Since your school of thought is very much W. buffett and B. Graham. I suggest incorporating their theories into the analysis to give the new readers some perspective and why it's a good one.

A bulletpoint form summary will help... too much word bring no value to readers.

Keep it up


Mr ICICI said...

this is totally out of point. but....

looks like donmihaihai's beloved jaya could be in refinancing trouble.
donmihaihai has been endlessly pointing out how strong their bs and cashflow is compared to ezra and swiber, and yet jaya is the one facing problems.
anyone can give an answer?

SGDividends said...

Hi MusicWhiz..

Was researching about Boustead. Kinda think this company looks Fundamentally strong.

I have 2 reservations has been answered in that FF is looking for acquisitions that have recurring income. Good. Hope that is executed well.

Now the other reservation is when researching just seem to me that this company is hinging on the capability of one man..FF. ( As a comparison Similar to Steve Jobs of Apple). I know FF is a very capable man..and a turnaround specialist. But im just concern about the succession plan especially he is like 66+ years old now...

Boustead, though a 180+, company does not actually have a lot of experience in the current businesses it is in now. Only the name is 180+ years, and the experience is more like 6-10 years i suppose..

Just some thoughts. Hope to hear from you especially about the succession plan.

As WB said" Chooose a company that an idiot can run" . Hope his successor is not an idiot cos Boustead business is not exactly easy.


musicwhiz said...

Hi JasonLim,

Thanks for the suggestions. Will strive to improve on the quality of analysis and the presentation, though I must admit that this current format makes me more comfortable rather than using bullet points, as some important info may get "lost". I can also express myself better using prose rather than as bullet points.


musicwhiz said...


I can't really comment on Jaya as I do not understand their business model well enough. All I can infer is from the press release and some news reports which had been published recently.

Apparently, the company had a build program for new vessels, and this was to be funded by the disposal of their older vessels which would then provide sufficient operating cash flows. Their capital commitment was S$700 million, so I read, and eventually this proved to be much too heavy a commitment.

The Company had the misfortune of meeting lenders who were not supportive enough of the Company during such weak times, and this proved to be a liquidity issue. I am also monitoring how they plan to resolve the situation, but the appointment of nTan is not a very good sign as it means there should be some corporate restructuring going on.


musicwhiz said...

Hi SGDividends,

Yes, succession is an issue definitely. Shareholders may bring it up at the AGM, but I am not sure if there is any contingent plan at all. I don't think the Company can be run competently by just any one (i.e. an idiot). So hopefully they have some systems in place in case anything unexpected happens to FF Wong.