Friday, December 04, 2009

Boustead – 1H FY 2010 Financial Analysis and Review Part 2

Part 2 of my analysis of Boustead will focus on their revenues by division and also each division’s PBT margins. Boustead has now provided shareholders with the breakdown of PBT by division and how each division is doing in terms of profitability; which is good because it helps us to evaluate how well each division is doing in terms of profitability and not just based on growth in revenues. Efficiency is an important aspect of a company though it often escapes notice; and some companies do not stress enough on profitability but tend to harp too much on revenue growth alone, which I feel is totally missing the point.

Divisional Revenue Analysis

As can be seen in the table above, Engineering Services managed to grow divisional revenues by 15.9% for 1H 2010, and this constituted 83.7% of total revenues compared to 80% in the previous period. When one looks more closely at the breakdown, it becomes apparent that the increase was due mainly to a 70% increase in revenues from the real estate solutions division, whereas the other two divisions of energy-related engineering and water and wastewater engineering posted fairly steep declines in revenue. Geo-Spatial, being Boustead’s cash cow, managed to keep revenues fairly steady as most of their contracts and customer base consists of governments and municipal townships, hence this is a stable market which will not be much affected by the global financial crisis. In fact, the 9.2% dip in revenues for this division could be almost solely attributed to the weakening of the Australian Dollar against the Singapore Dollar (which has by now reversed).

For Energy Related Engineering, apparently queries have been coming in rather slow according to the company, as oil and gas companies tighten on their spending for E&P amid a backdrop of tight financing. Negotiations are taking longer to conclude and contract size has also shrunk, with the last announced contract on November 10, 2009 being just S$14 million. Prior to this, there was a contract announcement as far back as July 27, 2009 (nearly 3.5 months gap) worth S$27 million. If one looks even further back, Jan 12, 2009 was the date of announcement of 5 contracts worth S$64 million (implying each contract is worth S$13 million on average). From this evidence, it seems the contracts for BIH and C&E are only coming in sporadically, and so far for 1H 2010 has amounted to only S$54.3 million of revenues compared to S$73.2 million for 1H 2009. Another problem is that of Boustead Maxitherm – it seems to be going through a never-ending period of “re-structuring”, which I have read about in almost every Boustead announcement so far. This begs the question: what exactly is going on with Maxitherm and why is the restructuring taking so long? So far no answers are forthcoming from the Management on this, and is something to raise up during the next AGM as it is dragging down the performance of this division.

Water and Wastewater Engineering Division (represented by Salcon) was dismal once again, registering revenues of just S$7.9 million, a 53.3% drop against S$16.9 million in the previous period. The reason provided was that revenue recognition on existing projects was “slow”, with another ominous announcement that the S$175 million Libyan Water Project (of which Boustead had taken a 65% stake in) has met with teething problems due to disagreement with the client’s consultant and hence may not even proceed. It was originally slated to be completed by 1Q 2011 but seeing how things are moving, Salcon may have to give up recognizing any revenues on this entirely. From these developments, one must start asking if the effort involved in turning Salcon around is akin to flogging a dead horse; for it has been nearly 3-4 years of restructuring and selling off unprofitable aspects of the business and yet the division has yet to show a profit. While FF Wong has been candid and up-front about this persistent failure to turn this division around, he nevertheless doggedly hangs on and expends considerable effort in realizing his dream of having 4 profitable divisions within Boustead, instead of just three. My feel is that without a strong competitive edge, it may be very tough for Salcon to secure significant contracts with high enough margins to ensure a turnaround. Recent unfortunate developments have further exacerbated the old problems and dampened shareholders’ hopes that a turnaround can be achieved in FY 2010, even though Management sounded a note of optimism.

For the real estate solutions division, it is helmed by Boustead Projects which is 91.7% owned by Boustead Group, as well as the newly formed Boustead Infrastructures which is in charge of the S$300 million Libyan Township Project in Tripoli, Libya. This division registered a very healthy growth of nearly 70% in revenues from S$78.2 million to S$132.9 million, and this was largely due to increased completion of the Libyan township project (about 1/3 done), rather than Boustead Projects securing more Design and Build Projects. In fact, in the next section, it is revealed that PBT margins actually fell even though revenues surged, probably due to higher costs involved. If one takes a quick glance at recent business developments for Industrial Real Estate Solutions, one would notice that so far for 2009, Boustead have been awarded just 3 projects; as compared to four each in 2008 and 2007. Management has also reiterated that FY 2010 will not see a sale of leasehold property, and so profits will be lower solely due to this as there had been a sale of at least 1 property in each of the last five financial years. More will be discussed in Part 3 regarding the prospects for this division.

Geo-Spatial is the only division within Boustead which is not contract-based, and represents the Group’s cash cow as it has steadily growing revenues, a captive customer base and high margins. The technology is used by Governments for satellite mapping and 3-D event modelling and ESRI Australia is in charge of marketing the software in Australia, while ESRI South Asia markets it to the rest of South-East Asia. The revenue decline was minimal in this case due to the factors described.

Analysis of Divisional PBT Margins

From the table above, it clearly shows that while some divisions seem to be doing “worse” compared to the previous period, in terms of PBT margins they are actually better off. This is why an analysis of revenues alone is insufficient to determine the strength of each division and also to assess its potential moving forward. Though trend analysis for margins can be used to project and extrapolate into the future, one must take note that changes in business and operating environment can result in changes in PBT margins which may either surprise on the upside or downside.

For Energy-related Engineering, though revenues dropped 25.8% PBT only fell a modest 4.6% and PBT margins actually increased from 11.9% to 15.3%, which is positive news. This implies that though the Group was taking on lesser projects as a result of the global financial crisis causing negotiations to lengthen and some clients to defer spending, they have managed to make up for this by reducing costs on the projects which they did take up; and probably this was as a result of stringent cost control and definite guidelines on which projects to accept or reject.

Water and wastewater engineering was a major disappointment despite the repeated promises by the Chairman to turnaround this division. Revenues dropped by 53% due to the slower completion of projects, but higher costs caused net loss to increase by 33% (even though technically lower revenues should result in lower costs). I am not sure why Management is confident enough to assert that this division would register a profit by FY 2010; but this is something I would like to see with my own eyes instead of believing time and again that they can turn things around. My opinion is that if they are unable to turn this division profitable, perhaps they should consider selling it away and channelling the cash for other more profitable pursuits instead of letting it bleed away.

Real-Estate Solutions division saw an encouraging 70% increase in revenues, mainly due to the progressive recognition of revenues for the Al Marj project in Libya; but PBT margins had dropped from 14.2% to just 11.3%; probably due to higher sub-contractor and raw material costs. While the project has been reported to be proceeding smoothly, Management needs to keep an eye on costs to ensure the increase in revenues is not more than wiped out by the increase in costs.

For Geo-Spatial, PBT margins have dropped as well from 28.5% to 24.9%, probably as a result of higher costs due to the exchange difference (costs incurred in SGD, revenues in AUD). Still, the division managed a decent PBT of S$9.1 million on revenues of S$36.6 million; and moving forward the AUD:SGD exchange rate have stabilized somewhat, so this should smoothen the fluctuations in revenue recognition for this division, and also minimize the impact of exchange losses.

Part 3 of my Boustead analysis will focus on the Company’s plans and prospects in the next 6 months, and also comment on how they can create more value for shareholders.

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