Friday, June 18, 2010

Boustead – FY 2010 Financial Analysis and Review Part 1

Boustead released their FY 2010 results on May 27, 2010, and followed this up with an audiocast of the results along with a presentation and question and answer session. The results were in line with what I had expected and also what the CEO Mr. FF Wong had mentioned early on during 1Q 2010, that FY 2010’s performance will not surpass that of FY 2009 and make it an eighth consecutive year of record revenues and net profit. This is part of business reality – companies do experience dips in revenues and profits as a result of economic activity which directly and indirectly affects their core business. However, if the company and run and managed well, it should emerge stronger after a global crisis and may even take the opportunity to consolidate its resources. Boustead would seem like a good candidate for this, though thus far no progress has emerged on their M&A talks.

This analysis will be somewhat in depth and broken up into 3 parts – it will tackle Income Statement, Balance Sheet and Cash Flow issues (as well as dividend), move on to divisional analysis and margins; and finally I will post up a transcript of the audiocast and discuss Boustead’s future plans including M&A and organic growth for FY 2011.

Profit and Loss Analysis (all numbers are based on FY 2010, not 4Q 2010)


Revenue for FY 2010 dipped 15% from S$516.6 million to S$438.4 million, and this was relatively modest considering the sharp downturn. Part of the reason for the dip was also due to the “lumpy” project nature of Boustead’s businesses, which means revenue may be recognized at different stages if a project depending on % of completion. Mr. FF Wong did caution that using quarterly numbers would not be representative of the Group’s performance, which was why I left out using 4Q 2010 for all my analysis and computations.

The good news was that COGS fell more than the drop in revenue, decreasing by 18% to S$305.8 million. As a result, gross profit took a more minor tumble of just 7% to S$132.6 million. Gross margin was 30.3% for FY 2010 against 27.7% for FY 2009, an improvement of 2.6 percentage points.

The drop in Other Income was due to the absence of gain from the sale of a leasehold property which was concluded within FY 2009. Going down the Income Statement, one should note that selling and distribution expenses had decreased 13% (roughly in line with the drop in revenues); while administrative expenses took a healthy tumble of 22% from S$55.4 million to S$43.2 million. Finance costs dropped by 54% to just S$1 million, and these two items reflected better and more efficient cost control as well as lower reliance on short-term debt financing by the Group. As an aside, I would like to remind that cost-cutting and cost-saving measures should be implemented all the time within any company, and not only when costs begin to spiral out of control. In Boustead’s case, FF Wong has traditionally ensured the Group operates in a lean fashion, whether during good times or bad.

Profit attributable to shareholders dipped by 28% as a result of the absence of the share of results from associate for FY 2010 (in FY 2009, GBI Realty concluded the sale of a property and recognized a one-off gain). Net profit margin stood at 13.4% against 15.8% last year, but note that last year’s net profit margin included several exceptional items. If the S$22.7 million were removed from FY 2009’s results, net margin would be just 7.2%.

Dividends


As can be seen from the figure above, Boustead’s dividend track record has not only been consistent, but it is also increasing steadily over the years. This is despite the acute sub-prime crisis and subsequent sharp and protracted global recession which crippled many companies and caused many reputable banks to collapse. Last year (i.e. FY 2009), Boustead paid out a total dividend of 4 cents/share consisting of 1.5c interim and 2.5c final. For FY 2010, Boustead has maintained the same dividend quantum, but added in a sweetener – a 1.5 cent/share special dividend. This brings total full-year dividend to 5.5 cents/share and at the last done price of about 80 cents, this translates to a yield of about 6.875%. At my purchase price of 55.8 cents, it represents a yield of about 9.86%. The reasons for the ability to sustain and increase dividends shall be elaborate on in the Cash Flow Statement analysis section below.

Balance Sheet Review

Boustead’s Balance Sheet remains solid with gross cash balances of about S$223 million, and net cash of S$199 million. Trade Receivables had increased by about S$16 million despite the drop in revenues due possibly to the lumpy project nature of their contracts, which means possible timing differences between billings and collections. Properties held for sale increased from S$37.4 million to S$69.5 million as this was one of the properties being constructed for a Fortune 500 company; the associated credit entry went to deferred income instead of revenues because the construction is not yet complete. Once completed, a reversal entry would be made to reverse out the current liability (in Trade and Other Payables) to revenue in the Income Statement. As a result of these, total current assets increased from S$375.9 million to S$473.3 million (+25.9%).

Under current liabilities, bank loans decreased as less financing was needed, while contracts work in progress amounts also dipped as more projects neared completion. Trade and Other Payables increased by about S$66 million but this was mainly contributed by the increase in property held for sale as previously mentioned. As a result, total current liabilities increased from S$218.6 million to S$265.6 million (+21.5%).

Adjusted current ratio (net of properties held for sale) stood at 1.5 as at FY 2010, against 1.55 in the previous year. The slight dip was due to the increase in property held for sale and the associated deferred income on the current liabilities side. Overall however, this ratio has remained healthy.

ROE was about 21.2% for FY 2010, dipping lower than the 30.9% due to the exceptional gain as described above, and also due to the dip in profits as a result of decreased business activities. However, an ROE of 21.2% is still very good considering Boustead had minimal leverage and was in a net cash position.

Cash Flow Statement Analysis (all numbers quoted refer to FY 2010 versus FY 2009 only)


As can be seen in the above table, cash flows for Boustead continue to be strong in spite of the lingering recession and slow global recovery. Mr. FF Wong has always been a prudent and conservative businessmen who likes to have lots of cash by his side to tide him over difficult periods, and it is apparent that this attitude is showing positive results as Boustead’s cash pool has been growing for the last 5 financial years; and shows no signs of slowing down! Of course, one must balance cash build up with appropriate and efficient cash deployment and utilization, for cash can end up being a drag on ROE. A realistic expectation (and challenge, no doubt) would be for Boustead to start to tap on its cash hoard for M&A activities or at least to generate a better-than-inflation return for shareholders.

Cash flow from operations was a healthy positive S$52.6 million, against $S44.8 million the previous year. Capex was just S$4.4 million for FY 2010, which means there was free cash flow (“FCF”) of S$48.2 million; FY 2009’s capex was S$14.6 million, and for FY 2009 the FCF was S$30.2 million. This has further increased their cash hoard to S$199 million, and because of this burgeoning cash stash, the Group has declared an additional 1.5 cents/share special dividend.

In fact, for FY 2010 investing cash flows was also positive at S$17.7 million, as the cash proceeds from the disposal of property by GBI Realty (concluded in late FY 2009) came flowing in (total of S$41 million).

As for Financing activities, Boustead spent about S$4 million doing share buy-backs for FY 2010, and the bulk of the cash outflows (S$20 million) was for the payment of dividends. Later, in Part 3, I shall discuss some of the potential uses of this cash stash as highlighted by Mr. FF Wong. He has also committed to paying out and maintaining the 1.5 cents/share interim dividend for 1H FY 2011.

Part 2 of the analysis cover the business divisions analysis (including margins) and discuss a little about the divisions, their plans and also their prospects.

15 comments:

Fishmonger said...

Master Musicwhiz,

Good job~ your analysis can η‚Ήθœ or not ?

cif5000 said...

I can see that you like to write/blog - by reproducing Section 8 in your own words. That's extremely time consuming but if you like it, it's perfectly fine. I know it's your hobby to *write* about investment.

However, if investing is a job, then one does not have that luxury of time. For me, I simply take the whole chunk and then add in my annotation at appropriate places. That saves a lot of time in doing the review. The other advantage is that it separates my own opinion from the officially published words from the company. So I don't get a bigger chunk of text and yet becomes less objective. It may seem impressive because of the number of words but a review should be short and sharp, in my opinion.

Studying a company for the first time is different from periodic review, and that may require more than a few paragraphs, I admit.

Just me, not to impose anything.

Shud'n said...

Hi MusicWhiz,

I would like to ask a question about cash and cash equivalent. Does the stated cash and cash equivalent in balance sheet consists of the long-term debt that the company has so far? If yes, how to find out the net cash position without any debts? Thanks.

Musicwhiz said...

Hi Fishmonger,

Not very sure what you mean by Dian Cai? Can explain huh?

Cheers,
Musicwhiz

Musicwhiz said...

Hi cif5000,

Wow, thanks frankly you have made some very good suggestions and I sincerely appreciate that, coming from a seasoned blogger like yourself.

Well, a few reasons why I do what I do, with regards to my analysis for companies. First, it's to maintain a diary of some sort for analyzing the financials of the companies in which shares I own, and I do this twice a year. I occasionally flip back to my old analyses to see if I was right or wrong about certain aspects as time passes - this helps give me a reality check too.

Second, I think Boustead's analysis is unique in the sense that the company is pretty detailed in breaking down each division and providing reasons (both good and bad) for the performance. While it is true that I make use of some of the explanations, I will supplement these with my own knowledge of the business and also my own thoughts frmo time to time. But what you said about annotation may work, assuming I want to copy/paste the chunk then add notes. I may take it up in future. :)

Third, as for being "objective", I feel this isn't as easy as it sounds because 1) we do not run the business, hence we will be unable to really know the inner workings and hence the problems/stumbling blocks; 2) scuttlebutt is pretty tough unless you are a full-time investor with a Phil Fisher mentality; 3) To a certain extent, we must trust what Management tells us - I take all these into account and then 1-2 years later check back to see if Management has followed up or if they had mis-represented back then. It's an iterative process which is far from perfect, but it suits me for now. In the absence of specific reasons for the performance, I'd be hard pressed to conclude anything to be honest.

You mentioned a review should be short and sharp; well I only partially agree with this. For reviews of financials for year-end, there may be various "red flags" which I have to pick up on and so I go into some explanation on why I think it's a red flag with numbers to support. As I said, this acts as a diary of sorts too so I can compile a list of questions to query Management during the AGM. I would sincerely like a review to be short and sweet if the financials do not have much changes. Note that my 1Q 2010 Kingsmen analysis was just 1 post long; but normally my detailed analysis for year-end results covers 2-3 parts. However, financials takes up just 1 part, operations another and usually qualitative factors like prospects/future plans is in the last section.

Ok, haha paiseh if I rambled on too much, just explaining why I do what I do. Yes it's tedious but for me it's kind of a fun hobby and I do understand the financials much better when I type it out in MS Excel and write about it. So in a way it enhances my understannd when I am "forced" to pen it down! Haha!

Regards,
Musicwhiz

Musicwhiz said...

Hi Shud'n,

That's simple. The Balance Sheet shows cash and cash equivalents in current assets; and that's the gross cash balance the Group has. Look under bank loans under current and long-term liabilities for the amount of indebtedness the Group has. Subtract this from the gross cash to find net cash.

As you can see, Cash was S$223.3 million as at Mar 31, 2010. Current bank loans was S$3.8 million, while long-term bank loans stood at S$20.3 million. If you subtract everything, you end up with NET CASH of S$199.2 million. That's how the Group arrived at this figure for reporting in the press release.

Hope this explains!

Musicwhiz

Shud'n said...

What if a company has more LT debt than the cash and cash equivalents (CCE) it has? Then, the net cash will be negative. What is your take on this kind of figures?

Why I'm asking is that I was analysing Singpost's FY2010. Their LT debt is at $503 mil and their CCE is only $390 mil. I was wondering where did the other $113 mil go to. Hopefully u can shed some light if u came across this kind of situation before.

Shud'n said...

And the CCE at the end of the financial yr (from cashflow statement) is the same as the CCE from Balance Sheet. So I'm kind of confused as for other companies it's not always the same figure.

Musicwhiz said...

Hi Shud'n,

Well, it's hard to explain all this in this comments box, as it's pretty detailed and you need to know basic accounting as well. Suggest you pick up a simple accounting book which explains Balance Sheet and Cash Flow concepts.

Cheers!
Musicwhiz

Createwealth8888 said...

Boustead Mgmt punting in a heavily debted Bio-treat for five years convertible into Bio-Treat shares at $0.04 per share. (penny stock)

Fishmonger said...

Can you made a list of recommendations on singapore companies that are worth investing ?

based on
Sound business model,
good dividends etc

V for Vendetta said...

Hmm, interesting..

Musicwhiz said...

Hi Createwealth8888,

If you ask me, I am also unclear on Management's rationale for this deal. Am waiting for more details to emerge on why they feel it's such a compelling deal, as I have quite a few reservations on this as well.

Regards,
Musicwhiz

Musicwhiz said...

Hi Fishmonger,

My policy is that I do not give out stock recommendations. Hope you understand. Thanks.

Cheers,
Musicwhiz

Musicwhiz said...

Hi V,

Thanks for dropping by, great job you did there with the fireworks display. I had thought you had perished when those policemen fired on you in the subway station but apparently not, as you came visiting my blog!

Say Hi to Natalie Portman for me! Though I usually much prefer her with hair....

Regards,
Musicwhiz