Boustead – FY 2011 EGM Highlights Part 2

Here is Part 2 of the highlights from Boustead’s recent EGM held on October 13, 2011 at Starhub Green.

On Energy-Related Engineering and Water and Wastewater Engineering Divisions

I was rather concerned about how the state of the world economy had affected oil prices, to the extent that they had hit one-year lows recently. When I asked about how this would impact the energy-related engineering division, the reply was that oil and gas will always be an integral part of the requirements for the economy; and the Middle Eastern countries would continue to chug along producing this key commodity for major markets. Boustead’s upstream and downstream divisions are still receiving healthy enquiries, and there were many smaller contracts which were concluded which would not be announced due to their size. Another factor was the secrecy required for contract announcements for this division – some of Boustead’s clients have stringent requirements regarding disclosure since these may be sensitive. It was good for me to know though, that BIH still had healthy enquiries and that the waste-to-energy division was also doing fine. However, it was mentioned that margins may be impacted due to the presence of aggressive bidding by Korean EPC contractors (a point which was brought up already during the AGM).

Regarding water and wastewater (Salcon), I also asked about the apparent lack of contract announcements lately. It seems that Salcon itself is busy at work with its current projects, including the S$25 million demineralization plant contract which was clinched together with Boustead Projects. I expressed concern over Salcon’s performance and how it may drag down the Group as they had reported a LBT (Loss Before Tax) instead of a PBT (Profit Before Tax) last year. However, I was reminded that the reason for the LBT was due to the write-downs for Libya, otherwise the division would have registered a PBT of about S$3 million. My worry was more for the relative instability of the division to generate a consistent PBT, what with legacy issues dogging the division since FY 2002 all the way till FY 2009 when they managed to break-even after restructuring, to the relatively tough competition and tight margins the division faced when bidding for contracts. My view was that the division should be divested if it continues to be a drag on the Group’s performance, and that I will be watching the 1H 2012 announcement closely to review the performance of this beleaguered division.

On Geo-Spatial Division

Geo-spatial division was a consistent performer and I did not have a lot of worries about this division as long as it could grow top and bottom line by 10%, organically. After the recent 2010 acquisition of MapData Pty Ltd, it saw a boost in ESRI’s earnings and Mapdata was considered a synergistic acquisition which really helped to enhance and boost ESRI’s service offerings. Management mentioned that they are always looking out for possible M&A, but since geo-spatial already has a 40% global market share, it will remain a good performer within Boustead and for myself, I knew that it was Boustead’s “Cash Cow” which not many analysts are aware of. It would be interesting to observe how this division performs in the upcoming 1H 2012 announcement as well.

On HanKore

Boustead owns 2% of Hankore Environmental right now (formerly Bio-Treat) and they had invested S$4 million into the company, purchasing 100 million shares at 4 cents/share. A shareholder did ask if Boustead intended to increase their stake in the company, and how HanKore could add value to Boustead.

On Share Buy-Backs

Boustead had re-purchased shares over six market days amounting to $391,000 for 475,000 shares. Treasury shares now stand at 12.492 million and the remaining issued share capital net of treasury shares is 503.25 million. At the last done market price of 81.5 cents, this values the entire Group at $410 million – more will be said on this later. One explanation given for the share buy-back was to support the share price; but my impression of a share buy-back was that the Group was unable to utilize its cash hoard to generate better returns of say 10% and above, which explained the rationale for re-purchasing it at a price which would yield about 4.5% (most of the repurchases were made around 83.5 to 85 cents). I did communicate my discomfort at this but apparently it was one of the ways of deploying cash which the Group had, and since I do have faith in Mr. FF Wong and the Management, I will also not dispute this practice. The key, however, is for me to eventually see the cash stash being put to good use rather than being continually spent on share buy-backs.

On retaining Good Talent

Another under-stated reason for the implementation of the Restricted Share Plan 2011 (which took 18 months to conceive and refine, incidentally) was to retain suitably good talent to enable Boustead to excel and do well for the future. Boustead wanted to retain a talent pool of capable and competent human resource but FF Wong complained that MNCs would poach talent from Boustead as they are considered an industry leader (Boustead Projects was at the forefront of such recognition). He cited an example of one project manager who was offered 2.5 times his salary to join an MNC, and lamented on how tough it was to retain good talent to be able to drive the business to greater heights. Hence, the introduction of the Plan would also tie into improving executive compensation in order to ensure employees who excel would feel adequately rewarded and not be persuaded to join a competitor.

On the value of the Boustead Group

When asked about the value of the industrial leasehold properties within Boustead’s stable, FF Wong gave a candid assessment, stating a market value of about S$160 million. After netting off the associated loans relating to these properties, one would still end up with about S$120 million worth of cash. Add this to the current S$200 million net cash and you would end up with a net cash balance of close to S$320 million, which is close to almost 80% of the current market capitalization of $410 million (above) purely in cash. FF Wong joked that this meant that you are getting essentially the rest of Boustead’s business almost free of charge! FF Wong went on to mention that the value of the name “Boustead” itself would be worth about S$50 million should he attempt to sell it, as they had already built up a very recognizable brand name within the industry.

When quizzed about Boustead Berhad having a higher asset value (the Malaysian arm of Boustead which Boustead Singapore had broken away from years ago), FF Wong replied that Boustead Berhad had the benefit of owning much more capital-intensive assets such as plantations which therefore increased their Net Asset Value. However, Boustead Singapore has achieved much more by remaining asset-light and focusing on retaining good human resources, and they had built up the Company by using this successful approach which was no mean feat.

My thoughts on Boustead

The purpose of my visit to Boustead was not purely to get an update on the operations and business conditions of the Group (though that was an integral part of it), but also to gain some comfort as to the plans and strategic director which the Group was taking over the next year or two. With economic conditions being so volatile and uncertainty reigning, there were other shareholders who also voiced concern over how Boustead would navigate the choppy waters and emerge unscathed.

From this meeting, I have obtained comfort that the Group has in place a rudimentary succession plan (still ongoing, no doubt, but it’s work-in-progress) and that they are also motivated to put their cash to good use. Management is keeping an eye out for good M&A opportunities now that the Eurozone is giving so many problems, and FF Wong is quietly confident that they would be able to finally put the cash hoard to good use. Boustead have a team of professionals who are adept at conducting due diligence on potential M&A targets, and I am sure that with FF Wong’s stringent requirements, Boustead would be able to select a suitable M&A target which would add value to the Group.

Conclusion

With the update being given to me and my own understanding of how the Group has done thus far, I do have the confidence that they can weather the upcoming storm. The numbers and facts also do give me the notion that the Group is undervalued from the point of view not just of the value of its leasehold property assets, but in terms of its core business, prospects and Management quality. Simply put, for a S$60 million net profit company to trade at a market cap of about S$410 million implies a PER of just below 7x, which is valuing the core business very cheaply indeed if you net off the cash hoard which the Group has.

I shall keep my eyes peeled for the next set of results for Boustead (1H FY 2012) due by mid-November 2011.