Boustead –1H FY 2011 Financial Analysis and Review Part 2

In Part 2 of Boustead’s review, I shall cover the divisional margins and also the plans and prospects for the Group, taking into account the recent interview with FF Wong as featured in Sep’s issue of The Edge Singapore. Note that much of the discussion will be based on plans and discussions which have yet to materialize, hence this material is meant to be informative rather than definitive. I would advise interested readers and investors to go through the actual articles and/or interviews (these can be found on Boustead’s website) to judge the content for yourself, if need be.

Divisional Margin Analysis and Review

The above table gives a very interesting snapshot of Boustead’s divisional margins for 1H 2011 versus 1H 2010. One can immediately see that for Energy-related Engineering, margins were adversely affected and had dropped to just 11.7% from 15.3% a year ago. So although revenues increased by a very healthy 38.7%, PBT only increased by 6.6% to S$8.8 million. It was mentioned in the press release that the upstream oil and gas business suffered a slow quarter, and I take it to mean that the contracts clinched also resulted in lower margins. This is rather disappointing as I had thought that with the successful restructuring of Boustead Maxitherm, this division would see stronger revenue as well as PBT margin contribution. Instead, it seems to be contributing to start-up losses, perhaps due to preliminary expenses or restructuring one-off costs?

For water and wastewater division, one can see that it has been a very valiant and admirable effort indeed by the team there, as they have managed to increase revenues by 65% to S$13.1 million for 1H 2011. However, as FF Wong had mentioned, this is a very low margin business, and this is reflected in the low PBT margin of 5.3% for a PBT of S$0.7 million. I guess the positive aspect of this is that even though margins are probably being squeezed, there is still some profit to be derived from the division which is adding to overall Group profit, rather than deducting from it. It remains to be seen if this can continue for 2H 2011, but with Salcon’s order book being much healthier than it has been in a long while, I am optimistic that the division will be able to pull off a second consecutive year of profitability.

Real estate solutions division (led by 91.7% owned Boustead Projects as well as Boustead Infrastructures) had a good half-year, with revenue rising by 41.3% to S$187.8 million. For PBT however, this was boosted by the one-off gain from the sale of a leasehold property which was booked in 1Q 2011, hence the PBT margin looks as though it jumped to 18.7%. The problem with the division is the lumpiness of earnings as it is very much project-based, and it also hides the fact that the Al Marj project in Libya is causing quite a bit of headaches for the Group due to the delays and design disagreements, which have resulted in slower-than-expected progress and cash flow hiccups. Still , for 2Q 2011, there were contributions from two major projects located at the Seletar Aerospace Park. With Boustead’s focus being on design, build and lease projects for more consistent income, this division should see better days ahead in terms of less lumpiness, though I suspect margins and revenues may suffer. Still, it may be a small price to pay in exchange for smoother and more predictable cash inflows for the Group.

The real surprise came from the Geo-Spatial Division, which (to me) always seemed like a slow growth division which acted like more of a cash cow. However, for 1H 2011 this division demonstrated revenue growth of 26.2% and PBT growth of 22%, with a very admirable PBT margin of 24%. I guess part of this can be attributed to the stable nature of geo-spatial technology demand, as most (if not all) of ESRI’s customers consist of government agencies; while the other reason could also be due to the recent acquisition of Mapdata Pty Ltd which provided a boost to the service offerings for ESRI Australia. Whatever the case, not much detail was given as to why the division managed to grow at such a healthy clip, but as they say – the numbers speak for themselves and I am very pleased with the performance of this division thus far. I hope that this encouraging performance can continue into 2H 2011 and perhaps we can see even stronger cash flows coming in to boost Boustead’s already-swelling cash stash. But then again, this stash is probably about to be deployed, as will be detailed in the section(s) below.

Prospects and Plans
(With extracts from The Edge Singapore article titled “Re-Orienting Boustead” published September 27, 2010)

There are plans for Boustead to make acquisitions in the coming months by making use of its huge cash hoard, and these acquisitions will leverage on its engineering expertise. Surprisingly, there was talk on possibly divesting of some of Boustead’s units in order to raise more cash for larger acquisitions. FF Wong’s focus is on becoming a pan-Asian company instead of spreading itself too thinly by going global, as it is very difficult to compete and be up against the very large players in the world. I believe this is part of the Group’s strategy to focus their resources on achieving more tangible results, and since Boustead is, after all, a Singaporean company, it made sense for them to focus on expanding their reach in Asia first.

It was mentioned that two countries where opportunities abound include Indonesia and Vietnam. My knowledge is that Boustead is actively exploring land banks in China and Vietnam and may even take a stake in them if it is deemed attractive, barring successful legal due diligence of course. It remains to be seen if there can be ample opportunities in these countries for Boustead to capitalize on to grow the business, but time will tell if things can pan out the way the Group wants.

Energy-Related Engineering Division

Interestingly, this division is expected to maintain its growth momentum on the back of high oil prices hovering around US$80 per barrel. The division was recently awarded about S$9 million in contracts in Brazil and Chile; and Boustead Maxitherm has also completed restructuring, which means I would expect contributions to flow in more swiftly for 2H 2011.

A surprising piece of news was that Boustead was contemplating divesting BIH (Boustead International Heaters), but the offers were “not right” according to FF Wong. BIH generated revenues of S$122 million in FY 2010 and occupy a “niche” market, hence Boustead is not in a hurry to sell and could consider expanding the division into the China market instead. Another option (which sounds quite appealing) is to list BIH separately in order to unlock the value of the business; and since the unit has built up an enviable track record over the years, this should not pose much of a problem. The advantage of a listing, as mentioned in the article from The Edge, is that investors can then better value the company and hence better appreciate Boustead’s diverse businesses. It was even mentioned that 91.7%-owned Boustead Projects could be considered for an IPO as it itself has a very good track record. I guess shareholders like myself have to wait with bated breath to see if there are any significant developments afoot with BIH and other sub-divisions of Energy-Related Engineering Division in the months to come.

Water and Wastewater Division

This division, represented by 100% owned Salcon, experienced a turnaround in FY 2010, and has been performing admirably for 1H 2011 so far. Salcon has been winning projects in Abu Dhabi, Vietnam and Indonesia and has been building up its order book, so even though margins are low and competition is keen, the division has still managed to eke out a small profit before tax. Barring unforeseen circumstances, I am confident that Salcon can continue to do so as they had just won a few major contracts (locally as well). Of course, recent news regarding Boustead’s intention to purchase a 20% stake in Bio-Treat through its convertible bonds for S$43 million also opened up the possibility of expanding this division quickly and decisively. However, as of this date, there has been no further news on this as the necessary due diligence (financial and legal) are still continuing, though the physical due diligence (inspection of assets) has been essentially completed.

A rather crazy idea which was mooted during Salcon’s loss-making years was to list the division when it chalked up three consecutive years of profits, as Salcon carried with it the reputation of being a Company with very strong technical expertise (not unlike Hyflux) and could hold its own in international circles. With the high probability of a second-consecutive year of profits for Salcon, this “dream” may yet come to fruition instead of remaining merely a fantasy. With Salcon operating in a tough environment amid stiff competition and tight margins, it may be better for Boustead to eventually divest itself of Salcon and realize some profits and cash; and use these to invest or focus on businesses which yield better margins, cash flows and ROE.

Real-Estate Solutions Division

It was mentioned in Boustead’s press release that the average value of enquiries has decreased even though the volume of enquiries has picked up. This is interesting as it would mean that the deal sizes would be smaller for Boustead Projects, but hopefully these also come with fatter margins (thus far the larger contracts seem to come with thinner margins). It’s actually not such a bad thing to snare numerous projects of smaller size, rather than waiting for one large project but getting worse margins for it. As things stand, Boustead is determined to focus its expertise on design, build and lease projects which are able to garner recurring income (and cash flows). This should bode well for the division in the years to come as it can leverage on its competencies to scale up its recurrent income base.

As for Boustead Infrastructures, it is disappointing to note that there are still teething problems associated with the Al Marj township project in Libya. Negotiations are under way to mitigate the negative impact of the delays and design modifications, but it looks like FF Wong’s foray into Libya may have resulted in more problems than benefits (though to be fair, it was unclear at the time that there would be so many issues). Even FF Wong admitted himself during the recent AGM that Libya was a headache. Hopefully, by 3Q 2011, the persistent problems can be solved amicably and an optimal solution be implemented to address the Group’s risks.

Meanwhile, another interesting development which I am tracking is the Big Box project which Boustead announced with TT International (“TTI”). Since readers can dig up some information on this from SGXNet and Boustead’s announcements, I will not go in depth into the salient details except to say that the Heads of Agreement and Long-Stop Date have both been extended, as TTI had recently been granted a court order to prevent it from being liquidated. This bodes well for the project which is expected to be cash flow positive and very lucrative for both Boustead (which is taking a 60% stake) and TTI (remaining 40%). It shall be very interesting to see how Boustead handles this deal and whether it can be successfully launched.

Geo-Spatial Technology Division

This division, traditionally recognized as the “cash cow” of the Group, has actually begun to grow quite steadily and I admit it was a surprise to learn of the increase in PBT. I guess this can be attributed to the stable nature of their client base consisting mainly of government agencies. Hence, this division is recession-proof as governments are unlikely to decrease spending even in the face of slowdowns or recessions. Looking ahead, I do not expect the same growth rate for this division as evidenced by 1H 2011; instead it will probably moderate back to the 5-10% level which is the long-term average. But as long as the division is raking in good cash flows, I am not complaining.

My next review for Boustead will be after the release of their FY 2011 results some time in May 2011. Until then, unless there are material developments associated with the Company, I will be content to just write about the Company in my monthly portfolio reviews.