Boustead – 1H FY 2010 Financial Analysis and Review Part 1

Boustead released their 1H FY 2010 results on November 12, 2009. Suffice to say that I was pleasantly surprised that even though revenue had fallen by 12.7% for 2Q 2010, net profit attributable to shareholders actually increased 12% to S$10.8 million, and was up 33.4% to S$20.2 million for 1H 2010. The table below offers a quick glance at the results of Boustead for 2Q 2010 and 1H 2010, and a comparison against the corresponding period last year.


Profit and Loss Analysis

One would immediately notice that gross margin has weakened considerably for 1H 2010, as the 10.8% rise in revenues was more than offset by the 17.2% rise in COGS, resulting in a decrease in gross profit of 3.3% from S$66.2 million to S$64.0 million. This can be attributed to margin erosion as costs are now higher and margins are also depressed as contracts are harder to come by, and customers have had to bargain for lower prices in order to accept jobs as financing is also tight. Gross margin contracted from 31.4% to 27.5%, and a closer look at each division will be done in Part 2 of this analysis, as well as offering a peek into PBT margins and I will provide possible explanations for the margin erosion, and whether I think it will persist in the medium-term.

Other income had also dipped by 40% from S$3.3 million to S$1.9 million as result of lower interest income and rental income. Fortunately, Boustead’s focus on cost controls managed to reduce selling and distribution expenses by 7.8% from S$12.8 million to S$11.8 million, and administrative expenses by 16.7% from S$22.9 million to S$19.1 million. Financing costs also fell by 52% as the Group had repaid some long-term bank loans during the 6-month period ending Sep 30, 2009. All these measures helped profit before tax to rise by 10%.

Income tax expenses also decreased by 16.2% in spite of the increase in profit before tax due to non-deductible items being present in the previous period and also due to difference in tax jurisdictions for their various subsidiaries. The result was a healthy net profit attributable to shareholders of S$20.2 million against last year’s S$15.2 million, up 33.4%.

Balance Sheet Review

Boustead’s Balance Sheet remains solid, with debt levels slightly down, net cash and sufficient liquid assets to tide it through a protracted downturn. Cash and Bank balances managed to rise by another S$10 million during the 6-month period to hit S$190 million, though the increase was attributed to investing cash flows rather than operating cash inflows (elaborated on in the next section on Cash Flow Analysis). Nevertheless, net cash now stands at S$163.4 million as at Sep 30, 2009 against S$150.6 million as at March 31, 2009, an increase of 8.5%. This represents a net cash per share of 32.3 cents, based on issued share capital of 505,512,000 shares. If we strip out net cash per share, this means the rest of the business is being valued at just 41.7 cents per share (last done market price of 74 cents minus 32.3 cents), effectively this means PER is just a low 5.2x based on an annualised EPS of 8 cents per share.

The increase in trade receivables is in line with the increase in revenues, so there is not much to get worried about here. Trade payables however decreased by about S$10 million and this represents a worrying sign that the company may be paying off its creditors quicker than it should, thus resulting in negative operating cash flows. Bank loans dipped slightly as Boustead had made repayment of loans during the 6-month period. Current ratio improved from 1.72 as at March 31, 2009 to 2.01 as at Sep 30, 2009. Quick ratio (defined as current assets less inventories and properties held for sale) rose from 1.51 to 1.78 over the same period.

Cash Flow Statement Analysis (all numbers quoted refer to 1H 2010 versus 1H 2009 only, and NOT 2Q 2010 versus 2Q 2009)


Boustead has traditionally had healthy operating cash flows but for the half-year ended Sep 30, 2009, operating cash flows were a negative S$12.7 million against a positive operating cash inflow of S$6.6 million in the prior period. This was due to the combination of an increase in receivables, coupled with the decrease in payables of roughly S$15.6 million and S$12.5 million respectively. If capital expenditures are factored in (see table above), then FCF is a negative S$13.8 million for 1H FY 2010. Better cash control should be exercised by Boustead to ensure it does not pay its creditors faster than it can collect from its debtors, otherwise it would lengthen their cash conversion cycle and this could become a problem.

Most of the cash came from investing activities, and as can be seen there was a net cash inflow of S$39.1 million for 1H 2010, as opposed to an outflow of S$18.4 million for 1H 2009. This can be attributed to the repayment of loan by an associate (GBI Realty) and dividends from the same associate of S$20 million and S$20.1 million respectively. Thankfully, capex was kept low for 1H 2010 with a cash outflow of only S$1.2 million for PPE, as compared to S$8.7 million outflow for 1H 2009.

Cash outflows for financing activities were mainly made up of share buy-backs worth S$3.75 million as well as payment of dividends worth S$12.7 million. The Group also paid off more bank loans than it took up, resulting in a net cash outflow of about S$1.4 million here. By comparison, in the previous year, higher dividends were paid out but there was absence of share buy-backs. It remains to be seen if the Company will use its excess cash to buy back more shares; or if they are saving up the cash for a suitable M&A opportunity.

The effects of the cash movements led to an increase in cash of about S$11 million to S$190 million as at Sep 30, 2009. This cash hoard still awaits deployment and I certainly hope the Management Team is scouting around for suitable investment opportunities, as holding too much cash can be a drag on returns.

Part 2 of the analysis shall be up after my November 2009 portfolio review, and will consist of an in-depth analysis, breakdown and explanation of Boustead’s divisions and how they are faring. Part 3 will end off with me giving my prognosis of the situation, prospects for each division and also to discuss where Boustead is headed for the remainder of FY 2010.