Tuesday, December 06, 2011

Boustead Singapore Limited – 1H FY 2012 Analysis Part 1

Boustead released their 1H FY 2012 results on November 14, 2011, and frankly it was not as disastrous as I had anticipated, considering there was an economic tsunami at our doorstep which would affect most companies. Though the numbers did not look spectacular, the Group put up a credible performance in general, with my only grouse (for the last few years, actually) being Water and Wastewater Division.

This analysis will be split into the usual three parts. Part 1 will touch on the financial statements, including income statement (briefly), Balance Sheet (more important) and Cash Flow Statement (the lifeblood of any company). Part 2 will focus on divisional analysis, and will break down the contributions by each division to Group revenue and PBT, and compute PBT margins as well. Part 3 will discuss Boustead’s industrial leasehold asset portfolio, dividends and also the plans and prospects moving forward, and how Boustead can navigate the stormy economic climate.

Financial Analysis – Profit and Loss Statement

On the Income Statement, there is nothing much to elaborate on as it was previously indicated that yearly results are more indicative, rather than quarterly. For 2Q 2012, revenues fell 30% year on year to $91 million due to slower recognition of revenue for real-estate projects due to Boustead’s focus on Design, Build and Lease (DB&L) projects, and the Energy-Related Engineering Division also saw slower recognition of revenue as contracts were in initial stages. These were the two main reasons for the drop in revenue, but it was more than offset by the 44% drop in COGS to $55.7 million, thus lifting gross profits by 14.4% to $35.3 million. For 1H 2012, the effect on gross profit was also stark (as can be seen from the table above); with revenues falling 43.7% but gross profit only falling 29.4%. Note that for 1H 2011, the results included a one-off sale of leasehold property which distorted the results. After adjusting for this, revenue would have fallen only 29% year on year for 1H 2012, instead of 43.7%.

An interesting point to note is that gross margins have, apparently, improved significantly. Gross margin for 2Q 2012 increased to 38.8% from 23.6% a year ago, and much of this improvement can be attributed to the Geo-Spatial Division (which we shall see later in Part 2, has a very high PBT margin as well). Also, several projects under the Real Estate Solutions Division garnered higher gross margins, thereby pulling up overall Group’s gross margin. For 1H 2012, gross margins were at a very healthy 37.4%, and hopefully Boustead can sustain this momentum for 2H 2012 as well in order to achieve better overall profitability.

Considering that net profit attributable to shareholders (for 2Q 2012) increased 12.7% while gross profit improved 14.4%, this shows good expense control. A glance at the Profit and Loss shows that selling and distribution and admin expenses both increased 15% respectively, in line with the increase in gross profits, with only a spike seen in finance costs as more debt was undertaken to finance Boustead’s leasehold portfolio under construction (more on this in Part 3). The same distortion can be seen for 1H 2012 due to the one-off sale of leasehold property, and after adjusting for this, profit attributable would have decreased a much smaller 5% instead of 56%.

Financial Analysis - Balance Sheet Review

Boustead’s Balance Sheet displays some changes since 6 months ago (March 31, 2011), and the focus now would be to comment on these changes and how they will impact the Group moving forward. For current assets, cash has fallen by about $17 million (more on this later), while trade receivables has seen a large drop of $30 million, offset by an increase in other receivables and prepayments of $9 million. The most significant increase, however, is that of investment properties under non-current assets – it had increased from $13.5 million to $41.4 million in just six months. Obviously, a lot of progress had been made on the construction of Boustead’s industrial leasehold properties and this was reflected in the increased capitalization as witnessed on the Balance Sheet. AFS investments also increased as part of Boustead’s Cash Management program, which involves the purchase of short-term blue-chip bonds with yields higher than bank fixed deposits.

Bank loans did not fluctuate much at all and remained relatively constant at $24 million, down slightly from $25 million six months ago. Current ratio was a healthy 1.69 as at Sep 30, 2011, against 1.95 in the previous period. ROE stood at 15.9% (annualized using 1H 2012 net profit attributable to shareholders), which is a little on the low side as a result of Boustead’s large cash hoard generating paltry returns.

Financial Analysis – Cash Flow Statement Review

Boustead’s cash flows have always been healthy, but for 1H 2011 OCF was lower than usual, at just $11.4 million. One year later, for 1H 2012, OCF hit $54.7 million, up nearly 3.8x, largely due to better collections from debtors and also an increase in Trade Payables. 1Q 2012 already saw an inflow of $34.4 million OCF, and 2Q 2012 has added another $20.2 million, and this shows that the core business is generating a lot of healthy cash flows, which are then used to invest in investment properties (and of course, with some left over for the payment of dividends). I will tie this in later with Boustead’s dividend history, and come up with a conclusion on whether I think dividends will be sustainable.

For investing activities, it should be noted that very little was spent on capex (in fact, just a mere $870,000 for 1H 2012). Most of the cash went into purchase of AFS and HFT investments, and I understand that this is part of Boustead’s strategy to reap higher returns on its cash hoard as it waits to deploy it into suitable acquisitions. A last check with the Company has revealed that this cash is most likely invested in high-grade bonds with short tenures, thus the yields are better than bank deposit rates though it may not exceed inflation rate of 5.5%. I guess what is more important is the protection of capital as even high-grade bonds may see instability in their pricing amidst the current turbulence.

Boustead’s stable of industrial leasehold properties is taking shape, as it spends $12.6 million in 1Q 2012 and another $15.6 million in 2Q 2012 for a total of $28.2 million for 1H 2012, and this shows up in the Balance Sheet as an increase in investment properties (by about $28 million as well). Part 3 will display Boustead’s portfolio of industrial leasehold properties, and I will also offer my comments on how I think Boustead will grow this portfolio and realize more value for shareholders in the long-run. From the table above, if we compute FCF the traditional way, then 1H 2012 would have seen a massive FCF inflow of $53.8 million. If we exclude the additions to leasehold property, then it would still have been a very healthy $27.7 million. Boustead has declared an interim dividend of 2 cents/share which amounts to about $10 million, and it can be seen from a glance that the $27.7 million FCF (net of leasehold property additions) is more than sufficient to support this payout. I will elaborate in Part 3 why I think Boustead did not pay out a higher interim dividend, using its dividend history as support.

Under Financing cash flows, most of the outflow was due to the payment of final cum special dividend (final dividend of 2 cents/share and special dividend of 3 cents/share for FY 2011), and about $1.5 million was spent in repaying some long-term bank loans. Cash balance remains healthy at $192.7 million, and with about $24.2 million in bank loans on its Balance Sheet, Boustead is currently carrying a net cash balance of some $168.5 million.

Part 2 of the analysis will delve into Boustead’s divisional performance, and I will have quite a few comments here based on my understanding of the Company, and whether I feel the Group can get through this difficult period relatively unscathed. This will be based on an analysis of each division’s contribution to Group Revenue and PBT, as well as the PBT margins by division.


setan said...

Hi MW,

May I know for the build & lease property, does Boustead own the property land lease as well?

If yes, it will have to finance through debt or bond.

Do you think they will able to distribute sustainable dividend go forward?


Musicwhiz said...

Hi Setan,

From my understanding, Boustead should not own the land. They are only awarded the contract for the building which they build and then lease back to the client. But I can clarify this with the IR just to make sure.

So far the debt is manageable and there is ample cash for progress payments towards completion of the industrial leasehold buildings.

Moving forward, I will be writing on the dividends and sustainability in Part 3 of this analysis. Watch out for that before the end of the year!


setan said...

Hi MW,

Appreciate you could update me once you got the answer from the IR. Thanks.


Musicwhiz said...

Hi Setan,

I have emailed the IR and their reply is as follows:-

All the DB&L leases are on JTC land. The land tenure is typically 30 years and Boustead will pay on a land rental basis which is spreada cross 30 years. Therefore, Boustead does NOT tender for the land.

Hope this answers your query.


setan said...

Hi MW,

Thanks for your update.


Jojo said...

Thanks for the very detailed analysis... u make me very lazy these days as I only need to read your postings : ) hahaha...

I have a few questions / comments and wonder if you can help..
1. I understand the FCF calculation but how did you derive the FCF (net of investment properties)? I calculated it to be 53.8-27.9 (taken fr net increase in investment ppty) =25.9M

2. I'm concern by the CAPEX spending. It seems a little low to me especially a company of this size. Normally I would like to see CAPEX spending in the range of 10+% of OCF. This would suggest that company is investing for the future - in either upgrading of machinery (faster and more efficient machines etc), softwares etc. With CAPEX that low, I'm concern on the future productivity, survivability... May seem a little exaggerated for this case..

3. I normally also look at the Sale/$ and Profit/$ of SGA spending and Boustead's has been on the decline. This basically measures their overall productivity. What's your view on this?

4. From my DCF evaluation, this company should really be trading a $2/ share. Do you have the same analysis?

Looking forward to your part 2 posting!


Musicwhiz said...

Hi Jojo,

Great to see more comments on Boustead, I really welcome them!

My replies as follows:-

1) I used the number under Investing Cash Flows of $28.2 million to include in my spreadsheet under "Increase in Investment Properties", and not the increase in the Balance Sheet amount. I figured it's more accurate as it is the "cash effect" rather than the accrual effects.

2) Boustead is pretty unique in the sense that they have very little requirement for capex as they are not into trading or production. Most of their expertise comes from their Engineering Knowledge and their human resource, and as a result they do not have to constantly upgrade machinery or spend huge amounts on facilities or equipment. In fact, Boustead specializes in high-end engineering services and for the lower margin fabrication, they would rather engage sub-contractors to do it (thus there is little need for spending or inventory as they outsource it). Even for their Industrial Real Estate Division, they do design and value engineering which does not require significant capex. In fact, most of the capitalization we are witnessing is going to Investment Properties and not traditional PPE as is the norm for other companies. For Geo-Spatial, they are developing software and applications and so most of the expenses would be SG&A related.

3) Actually I don't look at those metrics for Boustead. I have to check though - is that a method to measure productivity for manufacturing companies? Perhaps it may not be applicable to Boustead's business? Thanks...

4) I normally do not use DCF at all since I cannot reliably estimate cash flows into the future and the discount rate is also notoriously subjective. Perhaps you can explain how you arrived at $2 per share? That may seem a little high to me though, unless you are factoring a very high fair value for their yet-to-be-completed (industrial) investment properties portfolio.

Oh yes, Part 2 should be out in about 6 days time. Watch out for it!