Friday, July 09, 2010

Boustead – FY 2010 Financial Analysis and Review Part 2

In Part 2 of this analysis, I will be dissecting and commenting on the business unit performances for Boustead and also the underlying reasons, and to see if there are prospects for each division to improve and sustain its performance moving into FY 2011.

Divisional Revenue Analysis

Sad to say, Engineering Services division saw a dip in revenues from S$438.8 million in FY 2009 to S$360.9 million in FY 2010. A further breakdown shows that this was mainly due to Energy-Related and Real-Estate divisions registering lower revenues year on year. This 17.8% fall can be attributed to a slowdown in orders for these two divisions due to the global financial crisis, and as mentioned in the Group’s press release there was also a timing difference in the recognition of the sale of an industrial leaseback asset worth S$67.8 million which will only be taken in during FY 2011.

For Energy-Related Engineering, there was a 16.5% dip to S$122.3 million in FY 2010. Boustead International Heaters (BIH) continues to suffer from the exchange weakness in Pound Sterling which has impacted revenues from this sub-division (this has been going on for a few quarters already due to the ongoing crisis in Europe). Controls and Electrics fared worse due to tougher competition (the Company did not mince words on this, but the question is how to overcome the competition!), while Boustead Maxitherm had completed its restructuring in Indonesia, but was still being restructured in Australia. This of course implies that it was no generating optimal revenues and my grouse is that the “restructuring” has gone on for long enough, so when can shareholders see this division contributing revenues at full strength? It is definitely frustrating to read of such problems, but in a sense also refreshing as you seldom see companies come clean with problems as most of them simply love to trumpet successes. That said, it would also be helpful for shareholders to learn of how the division plans to resolve these issues and pull up the revenue contributions for this promising division.

For the Water and Wastewater division (i.e. Salcon), the turnaround finally came in FY 2010 with the division registering revenues of S$54.9 million, 105% higher year on year. While it is commendable that profitability has been finally achieved for Salcon after years of “restructuring” and legacy issues impacting the bottom line, one question I have is whether this profitability is a one-off thing (judging from the description of some of the items contributing to the profits for FY 2010), or whether it can be consistently sustained in future periods? Part of the answer lies in the audiocast by Boustead which I will provide a transcript of in Part 3 of this analysis, but suffice to say that shareholders will be waiting with bated breath over Salcon to see if it can maintain its performance for FY 2011. As at the time of writing, Salcon had also announced a S$21 million wastewater project to commence in Abu Dhabi in UAE, further boosting its order book. But the withdrawal of Boustead’s participation in a S$175 million JV for a water infrastructure system was a blow for the division was it would have contributed a lot to the top and bottom line for the division. But knowing FF Wong’s stringent standards, if the project could not yield good IRR, he would rather gracefully withdraw from it.

The Real Estate Solutions division saw a 31% drop in revenues to S$183.7 million for FY 2010, and this was mainly due to a drop in the amount of revenue recognized from existing projects compared to a year ago. It sounded strange to me that revenue from a design-build-lease project was “eliminated” upon consolidation, as this meant that revenue was recognized intra-group. Perhaps a more detailed explanation of the accounting entries would give a better idea on why this was so. I suspect the contract was recognized internally until the billing could be done to external parties; and was a timing difference, hence no revenue would be recognized post-consolidation. For the Al Marj Township project under Boustead Infrastructures, more than 50% of the villa is now complete (still slow, to be frank), and I would expect the remainder of the revenues to be recognized in FY 2011 with a possible spillover into FY 2012 as well. Boustead is also focusing more efforts on design-build-lease for more consistent and recurring revenue streams (more on this in Part 3 from the audiocast), and the press release had stated that they are focusing their efforts in China and Vietnam.

For Geo-Spatial Technology, since the customer base comes from mainly government agencies, it represents a very stable and recession-proof source of revenue and this division has been Boustead’s “cash cow” for some time. Revenues improved marginally by 0.8% to S$74.8 million which was commendable considering the effects of the global financial meltdown. Note too that this division under Geologic Pte Ltd has also released the web portal, which is a free website to enable Singapore users to access destination planning (go check out the URL for more info!); and on Feb 12, 2010 ESRI Australia had purchased a company Mapdata Sciences Pty Ltd for about S$3.16 million which will add to their customer base. Contribution will probably only be noticeable in FY 2011 as the acquisition was done late into FY 2010.

Division Profitability

By comparing the numbers in this way, one can see if profitability had actually improved year on year as I place the margins side by side. For Energy-related engineering, PBT margins had actually improved to 16.1% from 12.6% despite the 16.5% drop in revenues, and this shows better cost control and higher margins (possibly from better pricing) as compared to a year ago.

For Salcon, the numbers are not directly comparable as the division registered a loss in FY 2009 but a profit for FY 2010. There will be more discussion on this in Part 3 where FF Wong mentions in the audiocast about Salcon’s order book which will allow the division to break-even.

For real-estate solutions division, a direct comparison is also tough as the project revenue flows are lumpy and there was also additional recognition of one-off profits for FY 2009. Therefore, do not take the numbers at face value – otherwise it would seem that the division did much worse with PBT margins of just 9.1% compared to 22.2% a year ago! In light of the S$67.8 million divestment only being recognized in FY 2011, perhaps this should be reviewed again once FY 2011 is over to see if the PBT margins normalize.

For Geo-Spatial unit, PBT suffered an 11% drop (which was not adequately explained), and this could be due to the weakness of the AUD against the SGD. But it is a cause for concern as PBT margin fell 3.3 percentage points from 28.3% to 25.0%, even though revenues inched up 0.8%. Oh well, more questions to ask during the upcoming AGM, I guess.

Part 3 of this analysis will focus on the prospects for each division, based on the transcript of the audiocast held on May 26, 2010 (of which I will post up as well). I will also be commenting briefly on the M&A deal for 20+% of Bio-Treat, and offer my views on this.

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