Saturday, December 19, 2009

Boustead – 1H FY 2010 Financial Analysis and Review Part 3

Part 3 of this Boustead analysis will focus on future plans and prospects for the Company, amid the worst economic downturn in the last 70 years. Adding to the global problems is the recent news of a default for Dubai World, which has sought halting of repayments for their loans for 6 months while they re-structure. Fears of a contagion effect in the Middle East are still fresh, and as of this writing news is still uncertain about whether Dubai’s problems are mainly confined to the country itself and the bankers who lent it money, or if it is part of a more widespread regional problem affecting other Middle Eastern nations.

Energy-Related Engineering Division (C&E, BIH and Maxitherm)

Contracts are coming in much slower in recent months, as evidenced by the pace of contract win announcements from C&E and BIH. Contract values are also smaller and according to Management, this is due to the lengthy negotiation process as a result of the lack of financing due to the global downturn. From what I understand, most oil and gas majors have already kick-started their E&P activities as the recession passes; but most companies still expect significant cost savings and are pushing for vendors like Boustead for better terms, which has led to the longer negotiation times. In the next 6 months at least, I do not see much improvement in this division in terms of securing large contracts, as the macro-environment is still very uncertain and recovery remains tentative.

Over at the solid-waste recovery business (Boustead Maxitherm), ongoing re-structuring will limit the contribution of this division at least in the near future. It has taken a long time to re-organize this unit and my view is that Management should consider if the potential for this division to contribute outweighs the trouble and ongoing costs required to do a proper re-structuring. More details need to emerge on the exact nature of said re-structuring and the plans for this sub-division moving forward. The lack of clarity at the moment is disconcerting, to say the least.

Water and Wastewater Engineering Division (Salcon)

This division, headed by Salcon, recorded a weak performance but despite this, Management sounded a tone of optimism that FY 2010 will see Salcon finally turning around after years of being in the red. The division has been plagued by problems over the past few years such as intense competition eroding its competitive edge, and now the possibility of cancellation of its wastewater project in Libya due to disagreements with the client’s contractor. FF Wong did mention in FY 2008 podcast that Salcon was doing a trial run for a new technology at a China Textile Factory, and if this was successful it would greatly enhance Salcon’s competitive advantage and allow it to compete with the “bigger boys” such as Siemens. Thus far there has been no further news on this initiative. I am not optimistic on this division as I see it having razor thin margins and somehow Salcon’s global reputation has failed to garner it larger and more prominent contracts. One possibility could be that Boustead is a small player and does not have the scale of Hyflux, for example, to compete for very large projects. Thus, it is limited in terms of negotiation and bargaining power as a result.

Real-Estate Solutions (Boustead Projects and Boustead Infrastructure)

Boustead Projects has managed to clinch a healthy pipeline of projects, as reflected by recent announcements to build Charles and Keith’s facility and also another for Singapore’s first private cancer hospital. However, the division’s revenue remains contract-based, which in my opinion is a weakness. It was mentioned previously in FY 2009 podcast that the Group wished to explore Design, Build and Lease contracts which could lock in recurring revenues and cash flows, but which offered a smaller margin compared to Design and Build contracts. Considering that Singapore’s real-estate sector is just emerging from the recession, there may be opportunities in time to come for REITs to buy over properties which are developed by Boustead Projects, thus ensuring the continuity of recognizing at least one sale of leasehold property transaction per financial year. In the meantime, prospects for the division should remain muted amid the uncertain global backdrop.

The main cash cow for this division is Boustead Infrastructures, which is in charge of the Libyan township project (Al Marj). Being about one-third done, this has managed to boost the revenues for Real Estate Division and provided healthy cash flows as well. Moving forward, though progress has been reportedly slow, I would expect another one-third of the project to be completed by end FY 2010, and the remaining one-third to be recognized in FY 2011. After that, it remains to be seen if they can clinch a similarly large project, though FF Wong had hinted early on that this was extremely unlikely. It could be that he has other plans in mind for this division once the Al Marj project is successfully completed.

Geo-Spatial Technology (ESRI)

Geo-Spatial has a stable customer base consisting of government sectors and large organizations which use the software for mapping. Besides the currency loss which was registered for 1H FY 2010, this division should see slow but steady growth over the years and will likely remain the principal cash cow of Boustead Group.

Future Plans – M&A

With Boustead’s current net cash hoard of S$163.4 million as at September 30, 2009 (which represents net cash per share of 32.3 Singapore cents), the potential for M&A keeps growing every quarter. Management had mentioned time and again that they were on the lookout for good acquisition opportunities, and it must be a business which was going at a fair price and which could create synergies with their existing business. I suspect Boustead are also trying to “break free” of their current business model of orderbook and contracts, which can make revenues and cash flows “lumpy” and uncertain. Hence, the target should also be a business with a regular income stream (such as MTQ for example), without the need for contracts or orderbook.

Fortunately, Boustead’s Management Team has revealed itself to be cautious, prudent and discerning when it comes to assessing companies for acquisition. Just last year in their FY 2008 podcast, it was mentioned that the Group spent about S$1 million conducting due diligence on a potential company for acquisition; but decided against it when it failed to meet their criteria (for details on FF Wong’s criteria, see FY 2009 podcast transcript). In a recent Reuters interview, FF Wong again mentioned that the Group was at a very early evaluation stage for a potential acquisition in the range of S$5 million, for a company in the wastewater industry; but no further details were given and the disclaimer was that such negotiations were preliminary and may not come to any result. These two examples illustrate that Management take due care in sourcing for the right target to acquire, and have a strict set of criterion and guidelines with which they adhere to stringently. This may be the reason why there is still no news on any M&A activity even though several quarters have passed with the cash kitty building up. One more factor is that the selling prices of owners of companies continue to be out of touch with reality and the gap between buyer and seller is still as wide as a chasm; hence it is difficult to deal under such circumstances.

Closing Remarks

With the global economy still in the slow stages of recovery, Boustead will most likely still trade at depressed valuations due to lack of clarity for projects and contracts to be clinched by each division. I take comfort in the fact that the Company has a generous dividend policy and pays out dividends twice-yearly. Assuming they can maintain their full-year dividend of 4 cents per share, this represents a yield of 7.16% for me, which is more than satisfactory.

6 comments:

xor said...

MW, quality analysis as usual. As I'm looking at MTQ as an investment candidate, I can't help but wonder how does MTQ manage to have a regular income stream in their business unless they have a strong competitive advantage (moat) over their competitors. In that sense, every business can be viewed as project in nature based on the fact that each project count as a new line of income stream.

Musicwhiz said...

Hi Xor,

Well, from what I've read, there are only 2 other companies doing what MTQ do, as in BOP (Blowout Preventer), and MTQ have a long and established track record as well as certifications from USA, so yes I believe they do command a competitive advantage in this sense.

I guess for them, their customers constantly look to them for repairs and this is why they have a steady stream, rather than a lumpy "project" nature.

Regards,
Musicwhiz

PanzerGrenadier said...

Wishing you a Merry Christmas and a Happy New Year!

Be well and prosper.

Musicwhiz said...

Hi Panzer,

Same to you and your family too!

Regards,
Musicwhiz

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Musicwhiz said...

Hi Ngo,

Thanks for visiting.

Regards,
Musicwhiz