Sunday, September 11, 2011

Boustead – FY 2011 AGM Highlights

I attended Boustead’s AGM on July 29, 2011 held at the Company’s headquarters at Starhub Green. It was to be my fifth consecutive AGM for Boustead, and it was indeed amazing to realize how the Company had evolved over the years, since my very first attendance at the FY 2006 AGM. At the time, it was held on 6th floor of Boustead House and the Company was much smaller and less established. Now, the meeting was held at the second level of the new Starhub Green which Boustead Projects helped to construct, and the venue was a large and very beautiful-looking conference room. Since I was there very early (I like to be early for my AGMs as this means more chances to rub shoulders with key management executives in order to ask some questions before other shareholders arrive), I took some nice photos of the place. This would have been impossible later on as this year’s AGM was packed literally to the brim, with about double the number of attendees as compared to FY 2010’s AGM. More on that later.

General Comments on the AGM

Most of the AGM was, again, characterized by FF Wong (CEO and Chairman) giving his views on various aspects of the business, updating everyone on Libya and handling questions posed by shareholders and analysts on topics of interest. In his usual candid and casual way, he endeared himself to the crowd by being affable and approachable, coupled with a sense of humour to boot. His easy-going manner is definitely welcome as compared to some CEOs I had met who were a little too serious and uptight as they probably felt pressured to conform to market expectations of being a listed company, or possibly they were being “harassed” about why the Company was not doing better than it should be.

During the AGM, he was peppered with questions regarding each division of the business, which I shall elaborate on in the separate sections below. Some shareholders also bombarded him at length about the troubles in Libya, which caused him slight agitation as the questions were persistent and somehow one could detect a hint of blame behind the tone of the questioner, which put the CEO on the defensive. I will discuss my thoughts and opinions on the Libyan issue in a separate section as well.

The overall mood was one of satisfaction that the Company was well-managed even with the Libyan “blip”. Of course, the special dividend of 3 cents/share helped to sweeten the mood, even as shareholders deliberated on how the $200 million net cash on the Balance Sheet was to be utilized (incidentally, FF Wong did mention that this balance had ballooned to $228 million as at July 29, 2011).

Energy-Related Engineering Division

Boustead International Heaters (BIH) deals with detailed engineering processes and has a presence in many countries such as London and Malaysia. FF Wong said that BIH is in a niche industry and only has about four competitors. Their net margins are about 10%-13% and are under pressure currently due to competition, but volume has grown steadily since the recession ended. By comparison, Herte of France (which is one of the competitors of BIH) has only net margins of 3%.

For Boustead Maxitherm, an area of growth which Management is looking at is Green Energy. Boustead will be moving towards this direction in the years to come as it represents good potential. For power plants, the outlook is becoming more positive and buoyant and countries such as Indonesia require a lot of such plants to generate power to outlying areas. The country is too large to have a national grid in place, thus small power plants are required to cater to small pockets of the population; and this development represents good opportunities for Boustead Maxitherm to grow over the mid-term.

Water and Wastewater Engineering Division

Salcon will continue its focus on the niche water treatment industry and pitch itself for such projects. Even though it is up against global giants, it has still managed to clinch several high-profile contracts from reputable clients and has built up a respectable portfolio. Without the Libyan write-off, FY 2011 would have been another profitable year for the division.

Real-Estate Solutions Division

This division is easily Boustead’s largest revenue contributor and also its cash cow (aside from Geo-Spatial, of course). In Boustead’s AR, it was stated in the Chairman’s Statement that the aim was to build up an industrial leasehold property portfolio of 200,000 to 300,000 sqm. When I queried Management more on this, the reply was that this was the critical mass required for them to sell the entire portfolio to a REIT, thus unlocking value for shareholders. The rental revenue to be derived from Boustead’s current industrial leasehold property portfolio cannot be ascertained as it depends a lot on the type of building and the zoning (which affects the rental rates). As of this writing, the Design, Build and Lease portfolio has grown to about 90,000 sqm.

It is Boustead’s aim to grow their Design and Build portfolio as well, even though these contracts are sporadic and “lumpy”, in addition to focusing on their DB&L projects. It used to be the case where Boustead could sell at least one industrial leasehold property every financial year, but the problem with this strategy was that even though it brought in a lot of excess cash, it also meant that the Group would have to deduct one recurring income source. Boustead’s business model has to shift to one where the recurring income and cash flows from maintaining such a portfolio outstrip the benefits of selling the properties to clients for lump sum cash inflows. To do so, I reckon that Boustead’s other divisions have to ensure that they are all cash-flow positive and that the cash inflows more than cover the outflows to be made for progress payments to be made to contractors during construction of these leasehold properties. Once this “steady state” is reached, Boustead Projects can focus more of its attention on growing its leasehold portfolio, with the occasional Design and Build contract thrown in for good measure.

Geo-Spatial Division

Not much was discussed about this division as it is a pretty stable one with good and steady growth. FF Wong mentioned that in Australia, their market share was 85% while in Singapore it was 50%, with most of the clients being government agencies (hence, there exists a very low bad debt probability). There was already a good discussion on this during the recent audiocast, therefore I have nothing more to add.


With regards to Boustead’s most recent investment in HanKore (previously known as “Bio-Treat”), FF Wong mentioned that extensive and exhaustive due diligence was done on the Company prior to the investment. To recap, Boustead invested $4 million in HanKore by purchasing 100 million shares at 4 cents/share. HanKore has a complex group structure and the recent rights issue and fund raising meant that more parties were roped in to help the troubled company. It was mentioned that cash flow was poor for BOT projects (which is why Boustead themselves do not utilize the BOT business model) but prospects were good.

Recent reports on HanKore have been largely optimistic that the Company has put its troubled past behind it and would be able to generate healthy cash flows and profits. It remains to be seen, however, if this comes to pass. Boustead’s Management is not terribly excited about HanKore’s near-term prospects, and my feel is that they intend for this to be a medium-term investment.

Cash Management

Boustead’s cash management program allocated $50 million for the purchase of corporate bonds, and it was mentioned that $12 million was invested, out of which $1 million of profits were made (yield of about 8.25%). This ongoing program helps to ensure that the cash is properly invested in products which are not too risky, yet are able to generate a return higher than inflation. Instead of letting the cash sit idle, it will be put to good use while Boustead waits for a suitable M&A opportunity.

As at July 29, 2011, Boustead’s net cash balance amounted to $228 million. After the payment of the final plus special dividends, this will dip to “only” $200 million. FF Wong mentioned that holding so much cash has its advantages as well, as it allows flexibility for Boustead and also attracts more suitors who are eager for Boustead to assess their business to see if it can be bought over. Therefore, this opens Boustead up to more opportunities as compared to if it did not have its large cash reserve. Holding so much cash also improves Boustead’s reputation as a well-managed company and boosts its standing in the corporate world.

Boustead will continue to keep its eye out for potential M&A opportunities to utilize its burgeoning cash hoard. With the Europe crisis flaring up again and a crisis of confidence engulfing the Euro Zone, perhaps this may throw up juicy opportunities for Boustead to consider. However, since its focus is mainly Asian (and Asia has yet to experience a crisis as severe as the AFC in 1997), it may not be able to find attractive investment opportunities around SEA and may have to venture to Europe or USA. Whatever the case, shareholders like myself will have to keep the faith that the CEO knows what he is doing.


The above summarizes the main points gathered from my attendance at the FY 2011 AGM. The buffet spread was quite marvellous this time round (with lobster salad, crayfish and other high-quality food), but the experience was marred by a very cramped corridor which everyone had to literally squeeze through to get to the food. This meant a delicate balancing act when it came to shuttling food back and forth, and drinks were particularly tricky. It did not help that the conference room also felt cluttered with many chairs blocking the way. One of the shareholders requested that an auditorium be booked for next year’s AGM, and the Management said they would look into that request as they had not expected such a good turnout and were similarly caught by surprise.

I shall be providing another update on Boustead when it releases its 1H FY 2012 results some time in November 2011.

No comments: