Boustead released their FY 2011 results on May 26, 2011, and this was followed by the usual live audiocast where Management would take questions on the phone, as well as through the internet. These results were interesting because they illustrated Boustead’s first major crisis since I started investing in the Company in 2006 – and this was in the form of civil unrest in Libya, which is where Boustead are building a township in. The numbers were predictably bad, but surprisingly the overall performance remained resilient and the Company continued to generate healthy amounts of FCF in spite of this setback. Upon closer inspection, the impairment loss was merely a book entry (including provisions) and did not significantly affect cash flows during the period. I will elaborate more in the following sections.
This analysis is split into the usual 3 major sections. Part 1 will focus on the numbers, chiefly the Income Statement, Balance Sheet and Cash Flow Statement, as well as dividends. I will also include a special section on my investment in Boustead to date, as well as dividends received over the years; as this is my 5th-year Anniversary of being a Boustead shareholder (OK, 4.75 years but close enough). Part 2 will concentrate on the divisional analysis; and since Boustead has 4 main divisions this discussion may take up significant space and contain quite a bit of content (I am estimating this since I have not written it yet). Part 3 will include a full transcript of Boustead’s audiocast as well as my comments on certain relevant sections of the transcript. I will also outline Boustead’s plans and prospects for FY 2012, and comment on the strategies the Group is taking to grow its footprint further in South-East Asia.
Profit & Loss Statement
Boustead was expected to go through a rough patch for 4Q 2011, as it was evident from their announcements and press releases that Libya was going through a civil war and that all foreigners had to be evacuated from the country. While the impairment and provisions took up about $17.6 million in total, note that this was merely an accounting entry and had no impact on cash flows. The cash flow statement analysis section will demonstrate that cash flows continued to be very strong for the Group. If we look at revenue alone, 4Q 2011 saw an 8.4% rise in revenues compared to 4Q 2010, to $110 million from $102 million. Gross margin hit a high of 38.9% versus 36% a year ago; and if not for the provisions made for Libya, Boustead would have recorded a very strong 4Q and also a record FY 2011 net profit attributable to shareholders.
The thing which still continually amazes me about Boustead’s Income Statement is how the Group manages to grow revenues, yet keep costs manageable. If we look at FY 2011 numbers, revenues increased by 28%, gross margin increased from 30.3% to 31.8% and selling/distribution expenses only grew 27%. Administrative expenses, which consist of staff salaries, hardly budged and only grew a small 3%. Considering business activities had increased significantly leading to record revenues of $560.5 million for Boustead, their ability to keep staff costs low has been nothing short of remarkable!
Finance costs continue to remain low as Boustead has about $25 million debt in its books. For the entire FY 2011, finance costs were only $613,000, down 38% from last year’s $995,000. Share of results from associates has now been removed because of the sale of property by GBI Realty.
Balance Sheet Review
Boustead’s Balance Sheet continues to remain rock-solid, thanks to FF Wong’s constant emphasis on cash flow generation and his conservative stance on debt. PPE fell while investment properties increased, largely due to the increase in the portfolio size for the Real-Estate Solutions Division (more on this in Part 2). AFS investments also increased from $5.55 million to $9.684 million, probably as a result of Boustead’s $4 million investment in Bio-Treat (now known as Hankore – more on this in Part 3). Current assets stood at $435.9 million, out of which $209.8 million (48.1%) consisted of cash and bank balances. Trade Receivables dropped by 13.2% to $96.8 million in spite of a 28% increase in revenues, signalling that cash collection was healthy and improving. If we compare the level of cash to current assets, FY 2010’s level stood at 47.2% ($223.3/$473.3); therefore the level of 48.1% is impressive considering Boustead paid out a 2.5c final dividend, 1.5c special dividend (both for FY 2010) and another 2c interim dividend (for FY 2011). This is another indication of healthy cash flow generation.
Total bank loans remained fairly constant over the two years, with the level increasing from $24.0 million in FY 2010 to $25.2 million (+5%). This increase in 5% should not result in such a drastic drop in finance costs; therefore I suspect the loans may have been refinanced at much lower interest rates as SIBOR rates were at all-time lows during FY 2011. Current liabilities stood at $223 million for FY 2011, and current ratio for FY 2011 was 1.95, against 1.78 in FY 2010. The improvement was due to a combination of higher total current assets due to contracts work-in-progress, as well as lower current liabilities due to payments to trade and other creditors.
ROE improved to 22.8% from 20.2% a year ago, and this was achieved with minimal debt and a large cash position.
Cash Flow Statement Analysis
Operating cash flows for Boustead remained strong, hitting $52.1 million compared to $52.6 million last year. This was in spite of slower orders for both Real Estate and Oil & Gas Divisions for FY 2011, with momentum only picking up in 4Q 2011. Cash flow for investing activities was negative for FY 2011 mainly due to the purchase of the remaining interest in Boustead Projects for $19 million. The inflow of $27.4 million and outflow of $33.1 million represented movements for the Cash Management Reserve which Boustead are maintaining. This reserve was basically created to invest excess cash for higher returns, and they are mainly invested in corporate bonds. It is not very relevant to compare with FY 2010, actually, as cash flows then were affected by the sale and receipt of cash from GBI Realty of $41 million. So, if we strip out all the “one-off” cash inflows and outflows, then basically this section consists of just capex. And capex for FY 2011 was lower than FY 2010 at $3.3 million against $4.4 million.
As always, the bulk of financing cash outflows consisted of payment of dividends, and I foresee this trend continuing into the mid-term as Boustead continues to generate healthy free cash flows. For both years, FCF levels were almost the same at $48+ million.
Dividends at Boustead have an interesting way of increasing over the years, not that I am complaining! If we take a simple look at the dividend history of Boustead, they paid out 3.3 cents in FY 2007, and increased this to 5 cents in FY 2008 (inclusive of 1c special dividend), 4 cents in FY 2009, 5.5 cents in FY 2010 (last year); and now for FY 2011 they declared 7 cents. Revenues had actually doubled in 5 years and dividends have more than doubled (3.3 cents versus 7 cents). I have FF Wong and his team to thank for focusing more on slow and steady growth than explosive but unsustainable growth.
Investment Returns on Boustead and True Cost
This special section is devoted to analyzing my return from Boustead over the years and to compute the true cost of my investment after factoring in dividends received over the years. Please see below:-
According to the table above, my true cost for Boustead is about 40.2 cents/share. This takes into account my total investment cost in Boustead to date, minus all dividends received from Boustead to date. This does not, however, include the most recently announced final cum special dividend of 5c per share. If this was factored in, then true cost would be further reduced to 35.2 cents.
Part 2 of Boustead’s analysis shall cover Boustead’s business divisional analysis, and will delve into the prospects and aspects of each division, its order book as well as margins.
Update: Boustead's Energy-Related Engineering Division had just announced $23 Million worth of contracts yesterday (June 16, 2011). Together with $25 million secured in early FY 2012, this brings total order book for this division to >$55 million.