Boustead – FY 2011 Financial Result Analysis Part 2

Part 2 of my Boustead’s FY 2011 analysis will touch on divisional analysis, and will also provide some insights into Boustead’s varied divisions and talk about the prospects and plans for each. I guess I have probably done this about three times already in the past, but please bear with me as I feel that this is an essential part of the analysis as it seeks to break down the financial results into divisions; and for Boustead its divisions are so diverse that each should be scrutinized on its own merits. I will do the usual divisional breakdown analysis, as well as the margin analysis for each division; and add in my own comments and views.

Divisional Revenues Breakdown and Analysis

Glancing at the table above, it can be seen that Boustead had managed to grow revenue for Engineering Services to new heights, as a result of steady oil prices and a burgeoning order book for their Real-Estate Solutions Division. Sadly, Salcon did not do well due to slower recognition of projects, and there was also an absence of a large contract like the one for Toshiba Corporation in FY 2010. The boost in revenues therefore came mainly from Energy-Related Engineering, rising 15.2% to $140.9 million, and Real-Estate Solutions Division, rising an impressive 61% from $183.7 million to $295.7 million. This was despite the lack of recognition of any revenue at all from the (now) suspended Libyan Township Project (Boustead Infrastructures) due to the ongoing civil war conflict. Boustead’s Oil and Gas Division continued to do well as oil prices remained firm and their downstream services were very much sought after. In spite of a “subdued” performance from their upstream business and solid waste recovery business, the division still managed to post a rise in revenues year-on-year.

One would notice that Real-Estate Solutions Division now takes the lion’s share of revenue, as a proportion of Engineering Services Division. It made up 63.6% of revenues as compared to just 50.9% a year ago, and I am confident that this is the reason Boustead decided to buy out the minority interest in Boustead Projects (of 8.3%) during FY 2011 and make Boustead Projects a wholly-owned subsidiary. As a proportion of total revenues of $560.6 million, Real Estate takes up 52.7% of total Group Revenue, up from just 41.9% a year ago. This attests to Boustead’s strategy of focusing this division on a niche market in which it can compete very effectively and “lock-in” good margins. Boustead Projects is also building up its portfolio of Design, Build and Lease (DBL) projects which provide recurring income and cash flows, apart from just bolstering their Design and Build order book.

A somewhat surprising result also came from Geo-Spatial Division, which saw revenues increasing 26.6% from $74.8 million to $94.7 million. The major contributor to this was Mapdata Pty Ltd which was acquired in FY 2010, and FY 2011 saw a full-year contribution from this subsidiary. I have always maintained that this division is Boustead’s “Cash Cow”, and so I had expected slow but steady growth of 5-10% per annum; so I guess the results more or less blew me away! I do feel, however, that this may just be a one-off “spurt” due to the recent acquisition, and growth will likely moderate and slow down into either single-digit, or at most low-teens by FY 2012. Of course, as long as the division continues to generate tons of free cash flows, I for one will not be complaining.

Divisional Margin Analysis and Review

The numbers in the above table show throw up some very interesting observations. I guess it really pays to look deeper into the margins per division and not just rely solely on revenue figures and revenue contribution, as that only tells one side of the story (and not even the most important side). This is because margins often give a more detailed insight into what is happening within a division or company, and can offer tell-tale signs of trouble if one knows how to read and interpret the information.

Note that for Energy-Related Engineering Division, PBT margins were actually lower for FY 2011 (at 12.1%) compared to FY 2010 (at 16.3%). As a result, the increase in revenue of 15.2% was negated and PBT fell 14.6% to $17 million. No specific explanation was given either in the press release or audiocast as to the reasons behind the margin erosion, but I suspect this could be due to the nature of the contracts, with most of them being from the downstream oil and gas division which may command lower margins. For FY 2010, it could be that higher margin contracts were secured by other sub-divisions and resulted in a mix which yielded a higher PBT margin. Though contract flows are likely to remain relatively healthy due to the resilient oil price, I am concerned as to the sustainability of margins and whether they can improve back to FY 2010 levels; hence I will probably raise this as a pertinent concern during the upcoming AGM.

Water and Wastewater Engineering Division was actually doing somewhat decently before the massive write-offs due to the Libyan conflict. Boustead reported that PBT would have been $3 million if not for the write-offs, so based on a revenue base of $28.7 million, that would yield a PBT margin of about 10.5%, which is lower than last year’s 14.2%. Still, I take comfort in the fact that the Libyan write-off is a one-time adjustment and that Salcon is still managing to remain profitable in spite of stiff competition and niche focus. I had originally harboured hopes of seeing Salcon report three consecutive years of profits but as a result of the write-offs, this was not to be. For FY 2012, I am optimistic that the division can get past its troubles and shine again under the capable leadership of FF Wong.

Real-Estate Solutions Division had its results somewhat distorted by the sale of property to IBM, so the 61% surge in revenue must be adjusted for that. The PBT margin had improved to 12.8% which shows that the division is performing robustly, and notwithstanding the distortion the division has also built up an enviable track record of handling niche projects in the aerospace and electronics industries. The Division has, since the release of its FY 2011 results, secured more D&B projects as well as a few DB&L projects, and is on track to continue to grow its base of recurring income and cash flows.

Geo-Spatial Division was relatively stable in terms of margin performance, and netted a very high 25% PBT margin. Hence, growth would only come from top-line as the division expands through either acquisition or strategic alliances. This cash-cow division of Boustead has been performing well since Day One when I became a shareholder, and I suspect a lot of the dividends have come from the steady performance of just this division alone, against the more volatile results of the other three divisions.

Prospects and Plans by Division

I could probably provide a more comprehensive commentary on the above if I had attended the AGM, and if the Annual Report 2011 was in front of me! Nevertheless, I shall summarize the strategy for each division based on information which is already available.

For Energy-Related Engineering, Boustead will continue to focus on its upstream, downstream and waste to energy units to get them running on full throttle. Somehow, I feel that these three sub-engines have yet to run at full steam, thus depriving the division from realizing its full potential. With oil prices are a recent high (though they have somewhat moderated), this should bode well for this division and it has secured about $45 million worth of contracts for FY 2012 thus far.

Salcon is an enigma, to me at least. It’s tough to figure out if it does indeed have the competitive advantage which it touts, in order to bid for specialized projects which are very different from the BOT or BOO model which traditional water treatment companies go for. It also has the likes of Hyflux and SembCorp Industries as major competitors to contend with, so I really cannot tell if the division will continue to do well. Rather than struggle in its uphill task, my thoughts are that Boustead should consider divesting this division and focusing on the other three instead.

I guess Boustead Projects (now 100% owned) should continue its trajectory of contract wins, and I feel confident that this division can sustain its revenue levels and also generate good cash flows. Boustead Infrastructures is almost a complete write-off due to the problems in Libya, and with the additional exposure for Boustead due to the corporate guarantees, I do not see much light at the end of the tunnel. I guess Boustead would try to mitigate its loss where possible and recover as much as it can.

For Geo-Spatial, growth will definitely moderate as the effects of the acquisition tone down. But with sustained demand and good margins, this division should continue to perform well. There have been no specific plans mentioned to grow this division but I will find out more during the upcoming AGM.

Part 3 of this analysis shall present the full transcript of Boustead’s audiocast, and also include my comments on various sections of it.