Boustead – 1H FY 2011 Financial Analysis and Review Part 1

Boustead released their 1H FY 2011 financial statements on November 9, 2010. As has been the practice over the last few years, I will be reviewing just the half-yearly and full year results, and will post some comments and updates on the Company and its progress. Note that I will also include information from recent articles published in The Edge Singapore on Boustead, and present the information alongside the analysis and future prospects section to give a more balanced view of the Company and where it stands presently. Note that many plans are still sketchy and there are a number of initiatives which are stuck in “work-in-progress” mode, so readers should be mindful of them when making decisions about the Company (I will highlight these as I go along).

This review will be split into two parts (in order to keep each part manageable and readable). Part 1 will focus mainly on the financials (revenue and profit growth), margins, Balance Sheet and Cash Flows, and there will also be a little discussion on Boustead’s business divisions’ performance. Part 2 will continue with the business divisions’ margins and overall performance, and will also delve into the prospects and future plans for Boustead as we move into CY 2011.

Profit and Loss Analysis

For 2Q 2011, revenues rose 14% but this was offset by a rise in COGS of 20%, which resulted in gross profit falling by 2% to S$30.8 million. Gross margin for 2Q 2011 was just 23.6% against 27.5% for 2Q 2010. However, the problem arises when Boustead’s results are viewed on a quarter by quarter basis, as the Group has warned that revenues are lumpy due to the project flow nature of their work; hence it is better to use half-yearly or yearly comparisons. So if we view the 1H 2011 performance, revenues were up 38.4% while COGS increased a smaller 34%, resulting in gross profit improving by 50% to S$96.2 million. Gross margin actually improved year on year from 27.5% to 29.8%. 2Q 2011 saw higher expenses being incurred to expand BIH into Malaysia and China, and also for setting up a new office in Darwin for ESRI (Geo-Spatial). There was also a lack of contribution from share of results from associates. The good news was that admin expenses increased by just 16% due to Boustead’s consistent focus on cost-cutting, while finance costs remained negligible at S$194,000. The result was an increase in profit before tax of 79% to S$54.3 million for 1H 2011. With income taxes increasing just 35%, this led to an increase in profit attributable to shareholders of 98%. However, note that part of this included the revenue (of S$67.8 million) and profits from the sale of an industrial warehouse facility in 1Q 2011.

Balance Sheet Review

Boustead’s Balance Sheet has traditionally remained strong, and this time was no exception. Although cash balances dipped from S$223 million to S$208 million, debtors also dropped to S$99 million even though revenue improved. The reason for the cash dip was partly due to the drop in trade and other payables by about S$26 million to S$199 million. Current ratio stands at 1.97 as at Sep 30, 2010, compared with 1.78 as at March 31, 2010.

Debt levels are kept manageable, with short term loans standing at S$5.5 million and long-term debt at S$18.5 million (for a total of S$24 million). Net cash stood at S$174 million as at Sep 30, 2010 (net cash per share of 34.4 cents), and I believe they are keeping this cash hoard for potential deployment into either the Bio-Treat convertible bonds, or the Big Box project with TTI. More on this in Part 2 of this analysis.

Cash Flow Statement Review

Boustead’s operating cash flows for 1H 2011 are much healthier as compared to a year ago, when it was a negative S$12.7 million. For 1H 2011, there was positive operating cash flows of S$11.4 million, against capex of S$1.76 million, to yield free cash flows of S$9.64 million. For investing cash flows however, there was an acquisition of MI and purchase of AFS securities which drained cash of S$5.5 million. The net result was a cash outflow of S$6.4 million for 1H 2011, which was still lower in aggregate compared to operational cash inflows.

Most of the financing outflows were made up of payment of dividend, and the net cash outflow for the half-year was S$17.1 million. Boustead has still retained its war chest as it is expected to conclude the Heads of Agreement deal with TT International soon on Big Box (the agreement was extended till 1 December for signing, with the long-stop date set at April 11, 2011). Due diligence is also being conducted on the Bio-Treat deal and I would expect Boustead to make an announcement soon on whether they intend to proceed with this deal.

Divisional Revenues Analysis

Engineering services once again took the lion’s share of the revenue pie, contributing 85.6% as compared to last year’s 83.7%. Engineering service’s revenue also grew strongly, up 41.6% from S$195.1 million to S$276.2 million, largely boosted by real estate and energy-related solutions divisions. The difference this year is that the water and wastewater division is also making a meaningful contribution to revenue (and profits, as we shall see in Part 2). This had the overall effect of strengthening the rise in revenues, but of course the crux of the issue is the margins to be obtained from each division, as it is pointedly useless to discuss increases in revenues when profit before tax (PBT) does not budge at all. This will be well-covered in Part 2.

Interestingly, the mix is roughly the same for each division within Engineering Services. Boustead had been restructuring Boustead Maxitherm for some time now, and contributions should start flowing in from this FY onwards; while BIH and C&E made meaningful contributions to revenues. For 2Q 2011 alone, it was a slow quarter but Boustead sounded a note of optimism by saying that negotiations for small and medium contracts are expected to be facilitated.

Real Estate Solutions saw a slower quarter, as mentioned in the press release the value of enquiries had been going down even though this was balanced by an increase in enquiries. Another factor to consider is also the margins to be obtained on these design and build projects, and Boustead should also try to secure more design, build and lease contracts in order to fortify its recurrent revenue base. The township project in Libya is turning out to be more “pain” than “pleasure” as the progress has stalled repeatedly and FF Wong had mentioned problems regarding collecting of monies. Now, the Group is negotiating for a set of different terms to push forward, and to reduce their risks. Understandably, this also means that revenue contributions from Libya will be muted at best, non-existent at worst.

The surprise came from the 26% jump in the revenues for Geo-Spatial Division, as this has traditionally been a slow grower and more of a cash cow for Boustead. However, with the acquisition of Mapdata Pty Ltd back in Feb 2010, this has probably diversified its product range further and allowed the division (under ESRI) to bundle services to form a better package to customers (which are mainly corporations and government agencies).

Part 2 shall tackle the divisional margins and I will also be covering Boustead’s prospects and plans, along with the incorporation of some facts gleaned from a recent article in The Edge Singapore featuring Boustead and FF Wong.