Boustead – 1H FY 2008 Financial Review and Analysis (Part 2)

This is part 2 of Boustead’s 1H FY 2008 results review, and I will be concentrating on the Cash Flow Statement and also discussing the prospects and strategies for the Group.

Cash Flow Statement Review

Boustead’s cash flow from operations has traditionally been very strong, as they have an established set of core businesses which generate good cash inflows consistently. Their geo-spatial technology arm, for example, is a cash cow for the Group even though it has limited growth, as it is used by government agencies and researchers. Engineering services and real estate solutions also rakes in the cash by completing projects in a timely manner and ensuring they contract only with reputable clients who have lower risk of default. Part of the net operating cash inflows of S$18.5 million was also due to the stronger deal flow for 1H 2008, as compared to 1H 2007, as the Industrial Real-Estate Solutions Division headed by Boustead Projects had snared a record number of contracts. This is evident from the increase in receivables resulting in cash outflows of S$32.8 million and consequent increase in payables resulting in a cash inflow of S$40.2 million (again, this uses the indirect method of cash flow statement preparation). The result was a significant increase (more than 400%) in cash inflows from operating activities from S$4.1 million in 1H 2007 to S$18.5 million in 1H 2008.

For investing activities, the company had purchased a higher amount of fixed assets (at S$9.5 million, presumably for use in their engineering contracts) as compared to the same period last year (at S$4.9 million). However, the major cash outflows in 1H 2007 was from the consideration paid to minority shareholders in order to acquire more of Boustead Projects (55% to 95%) and Controls and Electrics (from 60% to 75%). For 1H 2008, the acquisition of shares from minority shareholders will include the remaining 10% stake in Boustead International Heaters Limited (payable in 4 installments on June 23, 2007 onwards). There was a net cash inflow of S$10.4 million from Boustead disposing of assets held for sale, and recognizing the S$6.5 million as gain on disposal in the Income Statement as well. All these transactions helped to lower the net cash outflows from investing activities to only S$1.4 million, as compared to S$28.7 million in the previous period.

Looking at financing activities, the Group had mainly spent cash on giving out dividends (4.5 cents per share less 18% tax in the previous announcement). Some cash was also used to pay off bank loans and dividends to minority shareholders, resulting in a net cash outflow of S$9.4 million. The lack of activity within this section shows that Boustead need not rely on financing activities to generate cash, implying that most of the cash is generated from operating activities and this is enough to keep the Group going. Of course, the argument is that too much cash is not a good thing unless the cash is properly utilized, which is why I am curious to see how the Group is planning to use its cash hoard of S$127.5 million in the months to come.

Prospects for the Group

Since Boustead has three main core divisions, I will comment on the prospects and plans for each and give my views accordingly.For the Energy-related Engineering division, prospects continue to look very positive as the world grapples with record oil prices (as at the time of writing, oil prices have hit an intra-day peak of US$99.29 per barrel, just a whisker away from US$100 per barrel) and a higher demand for energy due to the growth of China and India. Alternative energy systems developed by Boustead to convert waste-to-energy should continue to be highly sought after. With oil prices predicted to surpass the US$100 mark and continue their climb, Boustead’s expertise will continue to provide the Group with contracts and opportunities. Mr. FF Wong had mentioned that the Group was in the midst of negotiating several mid to large contracts in the coming months, so shareholders can sit back and wait for some good new to flow in.

For their water and waste-water division, Management is candid enough to admit that the division can hardly manage to expect to turn around this financial year (FY 2008) as competition has been stiff and margins have been low. During the AGM, Mr. Wong had already indicated that he was approached for many BOT water projects in China, but had rejected all of them due to low margins which made the projects unattractive. This is one aspect I highly admire about Management, which is their ability to say “no” if a project does not add value to shareholders and also their honesty in admitting that things are not going well. I hold integrity and honesty in high regard and Boustead has not disappointed me on these aspects thus far. Salcon’s eventual turnaround will definitely take some time and shareholders should be prepared for this, as Management turns their attention to the Middle East to try to secure contracts with better margins. It was also reported in their press release that they would continue to work on cutting-edge technologies to keep themselves one step ahead of the competition, and hopefully, these measures will churn up some worthwhile contracts for Salcon in the coming months.

Boustead Projects has been on a roll, and this division should continue to do well for the foreseeable future, as the construction industry in Singapore takes an upswing from the IR and the BFC. Property rates are rising and this will bode well for Boustead Projects in future as they plan to build and develop a few properties per financial year for sale. They still have several plots of land remaining for development and this presents untapped potential in this division. Their focus has shifted to building high-end tech buildings for multi-national clients and this has paid off for them, as Boustead Project’s order book swells to a new record high. Moving forward, the division looks very promising indeed as they continue to seek out opportunities to expand their order book.

For geo-spatial technology, the growth rate may not be impressive (only 5% per annum) but it can remain as Boustead’s “cash cow”, generating good cash for possible use in investing in other ventures or even to be used for a potential acquisition.

All in all, the prospects look bright for Boustead as their continue their sixth year of increased revenues and profits; possibly culminating into a very good dividend for FY 2008 as next year will be Boustead’s 180th anniversary celebrations.