Saturday, June 20, 2009

Boustead – FY 2009 Financial Analysis and Review Part 2

Part 2 of my analysis shall look at Boustead’s various divisions and their performance, as well as briefly discuss their prospects and order book as of this writing. It is important to note though, that some of the divisions had achieved record profits for FY 2009 which are not likely to be repeated, thus it is good to keep a realistic view of Boustead and not get too carried away with optimism. Realism should be the benchmark for an investor as he seeks an objective, rational picture of the Company.

Segment Revenue and Contribution

Engineering services saw a 20% jump in revenues for FY 2009 to S$438.8 million. Geo-spatial did not do so badly either with a 9.4% increase in revenues from S$67.8 million to S$74.2 million. Most of the contributions to Engineering Services came from the energy-related engineering division and real-estate solutions, with water and wastewater division showing yet another dismal financial year. I shall briefly examine and summarize the performance for each division and comment on its prospects.

Energy-Related Engineering Division

The order flow for oil and gas contracts was still steady, and thus Controls and Electrics and Boustead International Heaters got its fair share of business for the year. It was mentioned that negotiations for contracts would be slowed down in the coming financial year due to the global economic crisis; but the good news was that the rise in oil prices recently to about US$72 per barrel meant that oil majors and customers were willing to negotiate contracts again. It was also good news to hear that this unit secured its maiden contract in the United States, showing that it still had the ability to expand its geographical and customer base amid lean times. However, the ongoing re-structuring at Boustead Maxitherm also meant that it would take a while to contribute meaningfully to the entire division’s profits.

Water and Wastewater Engineering Division

Revenue for this division declined from S$35.9 million to S$26.8 million, mainly due to the slow start-up of major projects clinched and also because the division had to clear off legacy issues (discussed under Boustead’s audiocast in Part 3). The division will be working on three major projects, most of which will be recognized in FY 2010 and beyond. This division had been struggling to break even for the last 5 financial years, and FF Wong had expressed disappointment that it could not happen sooner, as too many legacy issues had to be cleared up before any meaningful and significant contribution could take place. Recall from FY 2008’s audiocast that Salcon was also exploring some new R&D initiatives in a China textile company that if successful, would give the Company a sustainable competitive edge which could see this new technology being applied to other projects as well, enhancing Salcon’s competitiveness and increasing chances for winning bids for new major projects.

Real-Estate Solutions Division

This division had a record year, which was expected since it had built up a large order book. Revenues ballooned from S$193.3 million to S$265.5 million in FY 2009, up an impressive 37.4%. This division made up 60.5% of the total revenue contribution of Engineering Services, up from 52.8% a year back. Boustead had signed contracts with many reputable blue-chip companies, some of whom were from Fortune 500, to design and build state-of-the-art facilities in various parts of Singapore. With Singapore attracting more and more such multi-national companies to open their plants and offices here, it is envisioned that this division would continue to garner contracts, though at a slower rate. Some examples of the projects done included the Singapore Freeport, a contract for an Aero Engine Services Facility as well as a S$67 million contract for a Semi-Con Manufacturing Facility. Boustead had indicated that they are moving slowly towards more design, build and lease jobs which would provide a steady recurring revenue stream, as design and build jobs would become harder to come by as the global financial crisis took its toll. The S$300 million township project in Libya will also begin contributing more in FY 2010, as progress has been slow due to teething problems at the start-up phase (quite succinctly expressed in FY 2008’s audiocast). To date, only more than 10% of the township has been constructed, thus there is still 90% more (about S$270 million) to be recognized.

Geo-Spatial Technology Division

I had always commented that this division was the “cash cow” of Boustead as well as the steady grower, and I was proven right once again as revenue increased a slight 9.4% to S$74.2 million, showing a consistent trend of about 10% increase year-on-year for the last 4-5 years. Since most of the customers belong to Government agencies across Australia and South-East Asia, the risk of non-payment (bad debts) is very low; and such customers will also ensure a constant need for the division’s services and products. I would expect this division to grow about 5-10% in the current financial year as well.

Divisional Profitability Analysis

Interestingly, this is the first financial year in which Boustead released their margins for each division, presumably upon the requests of shareholders which had been pestering them for such information for quite a while now. The information is interesting as it gives us an insight into the divisions which are more profitable, and shows up the poor performance of Salcon in even more stark terms.

Energy-related engineering did not have very high margins, as both years averaged about 11-12%. Surprisingly, real-estate solutions had very decent net margins of 22%, even though this was down from 31% in FY 2008. From what I remember about this division, a lot of it was charged on a cost-plus basis and this helped to mitigate the rise in the cost of raw materials (and construction costs); hence even though cost-plus ensured lower margins than would be charged on a tender basis, it helped to preserve margins at a time when costs had escalated wildly in the middle of FY 2008 (the time oil hit peak US$147 per barrel). I will not be commenting much on Salcon’s performance as the loss of S$8.4 million before tax is disappointing, to say the least.

Finally, it can be seen that Geo-Spatial commands more than decent margins of 28.3% and 24% respectively for FY 2009 and FY 2008. Had exchange differences not come into play, revenues (and hence profits) for this division could have been even higher. This also reinforces my understanding of this division being a cash cow, as the steady revenues and high margins ensure a steady inflow of operating cash flows, with low risk of debtors not paying as most are government agencies.

In Part 3, I will discuss the prospects and plans for Boustead moving forward, as well as post the FY 2009 audiocast transcipt. Stay tuned !

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