Tuesday, July 27, 2010

Boustead – FY 2010 Financial Analysis and Review Part 3

In this third and final part of Boustead’s analysis, I will post the entire transcript of Boustead’s audiocast for FY 2010 results, and after that I will highlight some salient aspects of the company (coupled with insights from the recently obtained Annual Report for FY 2010) to shed some light on the future plans and prospects for Boustead. Note that the company’s AGM will be held on July 28, 2010 at 10 a.m. at its office at Starhub Green.

Part of the reason for the delay in coming up with Part 3 was because of the arrival of the Annual Report (“AR”) and the voluminous amount of facts contained within, which required some time to digest and for me to come up with some thoughts and comments. Note that the AR should be read in line with the audiocast transcript and the reader should also have some background knowledge of each division and sub-division of Boustead and its press releases in the past 1-2 years, in order to fully appreciate and understand the implications of the analysis. I trust that readers can gather this information from downloading the AR and news from either SGXNet or Boustead’s website at www.boustead.sg.

Note too that I have inserted my own thoughts and comments in brackets throughout the transcript and highlighted this in blue and square brackets [ ] for easy reference.

Boustead FY 2010 Audiocast Transcript

Question: I’d like to congratulate everybody on board for the effort in delivering such a respectable result. In fact, I think if we exclude the results from the sale of some of the assets, I don’t really see much of a trail-off at all (i.e. not much of a decline at all). Is that correct?

FF Wong: The legal completion of the lease-back project – if we are able to do that, in fact actually this year we would at least match last year’s performance; but that’s not to be, the legal completion of the lease-back transaction was completed last month (i.e. April 2010), so the contribution will be reflected in the FY 2011.

Question: This set of results and also the forward guidance is really comforting. The one area which I really want to highlight is the amazing efforts of Boustead in churning out cash that really supports the accounting profits. If you look at it, the NTA as reported is 42.2 cents, the cash per share now is 39.4 cents. It’s literally 93% of the company, and also the other thing is if we exclude the cash, which is I think is generating very little returns in the current interest rate environment, the PE ratio of this company is less than 5 times. The question is, we did see 1.5 cents (special dividend) to reward shareholders, but then again Boustead has been very diligent in scouting for projects, so my question is – is there such a need to be sitting on a mountain of cash (and still generating cash); and I am pretty sure there is no lack of bankers out there who are more than willing to bank-roll any projects which Boustead is willing to go ahead with.

FF Wong: This year (FY 2010), we have paid 1.5 cents (interim) with another 4 cents (final + special), this will make it 5.5 cents; that actually constitutes 65% of this year’s (FY 2010) earnings. 65% actually is quite a handsome reward to the shareholders, and based on this year’s earnings I don’t think you should complain (laughter). Actually, I think we are very comfortable with our business model, and the way we have been operating we emphasize very much on cash flow, hence we have been able to generate very healthy cash flow, but having very healthy cash flow doesn’t mean we have to give it all up to the shareholders. In particular, in this current environment there are a lot of opportunities for M&A, and we have been diligently working on various acquisitions. Unfortunately, last year the economic recovery (with respect to the capital markets) has been V-shaped, and that has deprived us of an opportunity in concluding an acquisition. So the M&A effort unfortunately has not come to fruition, but that doesn’t mean that we are not working on it. Of course hopefully from our perspective, on one hand we hope that the economic recovery will continue to stay on course, but at the same time we also hope the capital market will not recover so robustly that we won’t have a chance to buy something cheap. Apart from M&A, we are also looking at various investment opportunities in green field projects as well, especially related to infrastructure projects. As you know, infrastructure projects do require substantial investment (i.e. capital requirements); hence there is a reason why we decided to keep as much cash as possible. But give us some time to look at it, and if we are unable to make any significant inroads insofar as M&A is concerned, please come and knock on my door again and perhaps we will decide to change our mind and pay shareholders more dividends and of course personally, I would be one of the major beneficiaries anyway!

Question: Mr. Wong, I really have to thank you for working this company and how it has delivered cash, because this company is simply amazing! Because year in year out you are generating so much cash, rather than accounting profit to support the fundamentals of this company. So I think at some point in time perhaps if you could give me a certain time line, I would definitely pay you a visit to knock on your door to see how we are progressing in utilizing the cash.

FF Wong: (Laughter) You are quite right. Actually if you look at the figures, the return on equity will be a lot more enhanced if we were to operate with less cash. If we were to return let’s say S$100 million to shareholders, then a very quick calculation will show that this year our ROE was 20%; then we would end up close to 40% (double). That’s quite obvious, but having said that I would like to hold on to a little bit more (cash) but for this year I would say the dividends are quite acceptable when compared with the norms. Somebody just called me and they confirmed that actually we are paying among the highest dividends in Singapore. And he said – how are earth are you all able to pay so much dividends? I said yeah you look at our cash hoard and based on the current price (of 76 cents), the dividend yield will be about 7.3%. If we were to compare ourselves with some of the companies which keep calling for capital and also some of these companies which have issued bonds, these bonds are only paying about 3-3.5% (interest) at most in Singapore. We are paying 7.3% and it’s quite an acceptable norm I think, perhaps you should be happy! (Laughter) Come and knock on our door at least 1-2 years later.

Question: On the water division, obviously this is the first time we are seeing the segmental breakdown, and definitely (I am) very pleased to see the results, but looking at the secured orders of S$20 million and S$30 million, would we actually slip back to the Dark Ages again?

FF Wong: I can share your sentiment too. Obviously we have gone through a lot, we’ve solved many legacy problems in the past, and finally at least we are able to put these legacy problems behind us, and these problems have been responsible for the heavy losses early on these last few years. We have trimmed it down such that the overheads are very very low; so I don’t expect that we will lose money even with such a low backlog. In fact, our breakeven based on our current margin is only S$20 million turnover, so anything above this threshold means that we will be making money. In fact, we are close to concluding some sizeable projects in the Middle East. All you need actually is another project, and it will double or triple the backlog. That is how sensitive it will be in terms of upside potential, then again we have not concluded as yet – that is the crux of the matter. You are concerned and I am also concerned, but going back to the Dark Ages I don’t think so. Thank you.

[Note: FF Wong is essentially telling us that he had cut costs within water and wastewater division to make it very lean; thus even a “low” order book of S$20 million will generate a profit for the division as fixed costs have been kept low. The potential Middle East projects are also likely to be a positive catalyst should they materialize. At the time of typing out this transcript, Salcon had just announced another additional S$21 million worth of contracts in UAE, so I am optimistic that FY 2011 will turn out to be profitable for Salcon as well.]

Question: Is there any news on the proposed M&A for the wastewater division which was mentioned some time back? How will Boustead be planning to utilize its cash hoard (which I noted had grown to a net cash position of S$199 million as at March 31, 2010)?

FF Wong: This question is somewhat similar to what Mr. Tan Joo Kiat has raised, except that it is more specific on the wastewater division (M&A for wastewater division). Of course this is one of the areas we have been looking at, but so far all those possibilities really didn’t meet our criteria. The return (the IRR) of all those projects that we had been looking at has been very low, and the other thing of course is that the strategic synergies also do not meet our expectations as well. But having said that, right now we are looking at one acquisition from last year onwards actually, but it died down for quite a while and now has come back alive again. We are looking at it closely, and we have sent our people to China to carry out some due diligence, but not quite a total due diligence as such. In other words we have actually done the preliminary due diligence on the physical inspection part of it, at least we know that these projects are real (that the assets are real), but we have not gone through the legal and financial due diligence. We do not expect that we will be able to use our cash hoard for the time being with respect to M&A for wastewater division as such. How are we going to use the cash hoard of S$199 million? As you know we just announced a final dividend of 2.5 + 1.5 cents = 4 cents per share, that is going to amount to about S$20+ million. That is going to be paid into the pockets of our shareholders, this means we will end up with “only” about S$180 million. You may ask how we are going to make use of the S$180 million? We have a lot of possibilities; first of all not only M&A but also leaseback projects. Leaseback projects would require some equity money; the banks are always very willing to work with us but by and large all these projects we are looking at will be leasehold. Definitely the banks will require some money. Some of the projects we are looking at are actually very big (very large), and I do not foresee that we will be able to use up all the S$180 million, but a substantial amount of money might be required for use as equity.

[Note: FF Wong is talking about the Bio-Treat deal in this paragraph, and this deal was announced only on June 15, 2010, nearly 3 weeks after the May 26, 2010 audiocast. Now, we know that the Company is in the process of finalizing the legal cum financial due diligence and it was mentioned in the press release that this deal may or may not go through.]

Question: Will Management be returning some more cash (i.e. special dividend) this first half of the year (i.e. 1H FY 2011)?

FF Wong: Some cash dividends will be paid in the first half of the next financial year. Usually we always try to be very conservative. I would say, on behalf of the Board, that we can commit to at least 1.5 cents/share. [Note: This is similar to FY 2010’s interim dividend.]

Question: I noted that the real-estate solutions division has shown rather "lumpy" revenues as a result not only of the township in Libya but also due to the nature of design and build contracts. Moving forward, will Boustead focus more on design, build and lease projects to ensure a more steady flow of revenue (and cash)? Also, Mr. Wong did mention that Boustead was contemplating purchasing land banks to develop properties in China and Vietnam in a previous interview (please correct me if I am wrong on this). Has there been any progress on this?

FF Wong: You are right actually, we have been working very hard to generate recurring income to overcome the lumpiness of the nature of our business. But unfortunately luck is also not with us. We had one project which we concluded beginning of last year, and that was supposed to be design, build and leaseback. It would have generated something like S$30 million recurring revenue for the next 15 years, unfortunately in the agreement our client had a clause included that they would have the option to buy back within 3 years. With the low bank interest rates around the world currently, they decided to exercise the option to buy it from us. So in fact this was the project I mentioned earlier on which affected our bottom line in this Financial Year (FY 2010). So, this will be reflected in FY 2011; but I personally would very much like this project to stay with us as that would ensure 15 years of recurring revenues. But I am sure you know that we still have 5 leaseback projects going on that continue to generate recurring revenue. I would like to stress that we do have some level of recurring income, not just with leaseback projects but also in the geo-spatial. About 50% of our revenues are recurring, and this amounts to S$30 to S$40 million per annum of recurring revenue. Obviously, we would not like to restrict ourselves to just Singapore in real-estate solutions. We have been dabbling in China and Vietnam; right now we own a small piece of property in Beijing, and that seems to be working out quite well but the margin is still not very exciting by comparison with Singapore. Vietnam is another place; right now we are negotiating to buy a piece of land but then again the IRR is not to our expectation.

Question: We have cash of more than S$200 million. It has been 3 years since Management had talked about acquisitions with the cash. To date there is no news on the M&A. What are the problems and hesitations? Can you share with us?

FF Wong: It seems everyone is concerned about our S$200 million cash, so I will dwell on it a bit more. I guess we have been very conservative and our expectations on IRR, or rather our criteria for M&A is perhaps overly high and cautious. However, I’d rather look at hundreds of M&A possibilities and finally conclude one rather than jump into so many and end up in trouble. Obviously, that would take time and I think it’s better to be cautious and take time rather than jump into acquisitions that we would regret. Once you get into something that has a can of worms, to correct it is always very difficult and painstaking. So, I’d rather be cautious. After all, we have been paying pretty decent dividends to our shareholders. For one, I have been happy with the dividends which I have been receiving myself.

Question: Can you update us on the whereto.sg initiative?

Keith Chu: Basically, whereto.sg successfully launched a few months back, and the idea behind this is that it is certainly something which is a basic application of our ESRI platform. What we are trying to achieve is to hopefully generate some revenues from companies or corporates who want to list on whereto.sg, but to put it in the perspective of the bigger picture, if you look at Geo-Spatial technology it is among the least understood of our businesses. And certainly I think it is so not just for investors but the world at large, and the way to really build up the community for geo-spatial technology would be to educate the public, and in that sense this is one of the initiatives which we are educating the public on the benefits certainly of geo-spatial technology, even if it’s a simple application. So I hope that sort of answers the question – we would like to generate some good revenue and profits from this business as well, while building up the community for geo-spatial technology.

------------End of Transcipt----------

Discussion on Plans and Prospects

One good aspect of FF Wong is that I noticed he tends to be quite candid and upfront, even with problems and obstacles. He often takes the blame and says things as they are; hence usually he ends up under-promising and over-delivering (which is a very good thing)! In terms of prospects, he mentions a few in the audiocast which I will detail below:-

1. For energy-related engineering, Boustead International Heaters (BIH) should continue to perform reasonably well on the back of stabilizing oil prices. However, the weakness is Pound Sterling is constantly a concern which may erode profits even if revenues remain constant. Controls and Electrics may suffer a fall in revenues and profits as Management had warned of tougher competitive conditions; but for Boustead Maxitherm, expectations are for this sub-division to do better as the re-structuring has been essentially completed in Indonesia, while it is at the tail end of re-structuring in Australia. Thus far, for the financial year 2011, there have been no contracts awarded for the oil and gas division of Boustead.

2. For water and wastewater engineering division, it appears that those thorny legacy issues have finally been ironed out after many years of restructuring and legal wrangling. Salcon reported a turnaround in FY 2010 and FF Wong has also stressed that the cost base has been kept low, so that even an order book of “just” S$20 million will enable Salcon to turn in a profit. If we combine the recent announced contract win for Salcon of S$21 million in UAE (Abu Dhabi) together with its existing outstanding order book, this comes up to about S$41 million. Therefore, it is reasonable to expect this division to continue to remain profitable for FY 2011, as there are still many months ahead for the division to further clinch contracts.

3. The real-estate solutions division has seen pretty strong demand as Boustead specializes in designing and building high-tech buildings with many modern features; hence I can say they occupy a niche market. With so many MNCs wanting to set up shop in Singapore, this would ensure a constant supply of business opportunities for this division. Notwithstanding this, the sharp economic recession did impact this division as can be seen from the drop in revenues and net profit before tax. The very last announcement was a double contract on March 31, 2010, one from Cenco Inc. and another from the Safran Group. Before this, on December 22, 2009 the division was awarded a S$108 million contract for an integrated facility (client not named). These contracts, coupled with the progressive recognition of the Al Marj project in Libya, should ensure cash continues to flow into the Group’s coffers and that the order book will remain of a decent size. It was mentioned during the audiocast that Boustead will be exploring land banks in China and Vietnam; but the IRR for China land is not very good. In addition, the division will also try to secure more design, build and leaseback projects to ensure a steady and consistent income stream (now that one leasehold project had to be divested as mentioned during the audiocast). It will be good to hear what the CEO and Management Team have to say about the prospects for this division at the upcoming AGM.

4. Even for the traditional “quiet” Geo-Spatial division, there is something to look forward to due to the acquisition of Mapdata Pty Ltd (88.2%) for S$3.222 million, as it comes with its own customer list as well. The idea is to serve more corporate clients and tap the higher margin end of this business, while increase ESRI’s capabilities over the long-term. How much of a boost this will give is not known, though, and the impact will have to be assessed when Boustead releases results for FY 2011.

5. The Annual Report mentions that the Group had looked at many opportunities but in the end only proceeded to act on one, which shows the level of prudence and due diligence which goes into evaluating suitable acquisitions for the Group. This conservative approach has worked well thus far for the Group in avoiding big flops but the recent Bio-Treat deal has made me wonder about Management’s thought process and rationale for the deal…..

Thoughts on Proposed Acquisition of 1% Redeemable Notes of Bio-Treat

1. The Convertible Note (CN) is paying interest of 1% per annum semi-annually; which to me seems like a really low return on that cash hoard. Most people can get 1% just dumping the cash into a long-term FD, with minimal risk. This CN thus carries a high risk of default.

2. Bio-Treat's financials are not exactly impressive. For 3Q 2010, it registered a net loss, Balance Sheet was in NTL position, there was a Going Concern issue, and heavy capex showed up in the Cash Flow Statement. The only +ve was that operating cash flows were positive. I can't imagine why Boustead would want to own 20.4% of this company when it can't even get its finances straight.

3. Bio-Treat is currently issuing rights and raising funds to clear off its massive debts; and its indebtedness to secured creditors. It looks like a pretty messy affair and there's no guarantee that after all the re-structuring, the Balance Sheet can be cleaned up. The new enlarged share cap (assuming conversion of all the CN) is about 3.9 billion shares! Any earnings will be severely diluted once the share capital expands by so much.

4. Boustead is spending about S$42 million out of its roughly S$199 million net cash hoard to acquire these CN; and this is about 21% of the cas hoard. I question if they may be spending too much of the cash on a company which has yet to undergo proper and successful re-structuring.

5. I understand that Boustead intends to buy into 20% of Bio-Treat as their "gateway" into the China water and wastewater market. It mentions synergies between Salcon and Bio-Treat. However, FF Wong also did mention in 2008 that the Chinese wastewater industry was highly competitive and margins were very thin. Thus, am not sure why Boustead chose to buy into Bio-Treat; a more pertinent choice may be Sound Global (formerly Epure) as they are a larger player.

6. Noted that there are many warranties and covenents to protect Boustead in case of any default or problems, but this Giant Delight is an unknown entity and there is also not enough information on Chen Dawei, and whether they can honour their obligations should things go wrong.

Other than the above points which I felt warranted mentioning and dissection, the effective conversion price of S$0.05 looks attractive compared to the last-done market price of S$0.08 to S$0.085 for Bio-Treat on SGX in the last few weeks. I guess more information needs to be provided on this complex deal as the terms and conditions are very technical (even for me as an accountant), and FF Wong himself has not commented on this acquisition even though it is a material sum of money for the Group.

The best method to get some answers is to grill the Management on this during the upcoming AGM. At present, I am not pleased with this corporate move until more light can be shed on the merits of the deal.


All in all, the general impression is that the Group is doing relatively well and holding up despite the global financial crisis putting a spanner in the works. By slowly building on their core competencies and divesting unrelated businesses, the Group can become stronger and more focused. The title of this year’s Annual Report is “Long-Term Focus”; and I have no doubt a shareholder should also share the same vision as the company with regards to his investment in Boustead.


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