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.