Boustead – S$300 Million Contract to Build Township in Libya

Boustead has announced on the evening of August 22, 2007 that it had clinched its largest and most significant contract to date: that of building a township in Al Marj in Libya. The total value of this contract stands at S$300 million and will be jointly entered into by Boustead and their joint-venture partner General Construction and Building Company (GCBC), which is the largest construction company in Libya. According to the agreement, Boustead will own 65% of the joint venture and it plans to build 1,164 single-storey semi-detached houses. Boustead will be utilizing advanced technology in order to augment the township and ensure that it is equipped with state of the art technology coupled with a modern Arabic architectural façade.

With this contract (Boustead’s largest to date), Boustead’s order book expands to close to S$700 million, a record for the Group to date. This success can be attributed to the Group trimming off its “excess fats” in order to focus its competencies on three core business; that of engineering, water/wastewater treatment and industrial real estate solutions. By specializing and possessing a high level of quality, Boustead is able to clinch contracts which span the globe. This is their main competitive advantage and continues to help them to secure new customers (as announced on August 13, 2007 regarding the S$26 million engineering contracts) in locations all over the world.

According to Philip Securities’ latest report on Boustead, the analyst Lim Thian Koon mentions that he expects more projects coming up for Boustead. This is predicated on the fact that the Libyan government is embarking on a long-term project to construct 400,000 homes in the country within the next decade. Boustead, being the first Singapore company to design and build a new township in Libya, would have establish an early foothold and gain a first mover advantage when it comes to the design and construction of more houses in other parts of Libya. In addition, Salcon is also just completing the construction of the largest sewage treatment plant there; thus Boustead’s name should be firmly entrenched within the country. This makes it all the more likely that more projects will be clinched by Boustead in future.

As for the numbers, taking the Philips’ Securities report as a good guide, this S$300 million project will be 65% owned by Boustead, which means a total revenue of S$195 million recognized over 24 months. As at the date of announcement, there are about 7 months remaining for FY 2008. Thus, the project is assumed to be 7/24 (or about 30%) complete as at the end of FY 2008 and this amounts to S$58.5 million. Management has informed Philip Securities that the gross margin for the township stands at 15-20% (this is taken from the report and cannot be independently verified); therefore yielding a gross profit of about S$8.775 million (using 15% because of prudence). I assume net margin is only about 5% of revenue recognized, so net profit will be in the range of S$2.9 million. Although this does not seem very high, please note that it is computed using very conservative assumptions and that Boustead Projects + the engineering division still have a fat order book for FY 2008 waiting to be recognized.

The intangible benefits arising from this record contract are obvious: it shows that Boustead has the ability and capability to clinch multi-million dollar contracts by partnering with other parties, when it was previously assumed that such mega-projects may strain the Group’s ability to properly manage and handle. Another plus point is that the Group is trusted and well-respected in diverse areas of the world which Singapore companies seldom dare to venture into. This gives Boustead a competitive advantage as it means that it can tap on its expertise in property development and high-end engineering solutions to provide a unique offering similar to the one demonstrated in Libya. In time to come, it is highly likely that Boustead would be able to collaborate with other partners in order to clinch more mega-deals, as it continues to focus on its core competencies and sharpen its competitive edge. Barring unforeseen circumstances, I can already envision that FY 2008 will be another record year of revenues and profits for Boustead, making it their sixth consecutive year of revenue and profit growth.

Next Post: More on Swiber’s newly appointed VP of FSO operations as well as their successful inaugural bond issuance amounting to S$108.5 million to fund their fleet expansion. Stay tuned !