Boustead – FY 2008 Financials Review and Discussion Part 1

I guess this was long overdue, but a review and analysis of Boustead should not be done in a hurry anyway. The company is slowly and steadily growing its business and its order book, and the CEO has expressed optimism recently that a turnaround can be expected in the water and wastewater division. I will be analysing the P&L, Balance Sheet, Cash Flow Statement as well as commenting on Boustead’s 3 main divisions (not counting ESRI which does geo-spatial – I will touch briefly on this) for Part 1. Part 2 will analyze and comment on the segmental business units for Boustead and their performance and prospects. Part 3 will touch on the future – how Boustead has progressed thus far in FY 2009, the direction each division is taking, as well as future endeavours that the company is planning to make (from FF Wong’s interview in Pulses magazine as well as his audiocast replies).

Profit and Loss Review

If one takes a close look at the Income Statement, revenues for FY 2008 had increased 27.5% compared to FY 2007, while COGS had increased by 33.5%. As a result, gross margin dropped from 34.1% in FY 2007 to 31.0% in FY 2008. This can probably be attributed to the slew of constructions projects which Boustead Projects had taken up, in which the cost of materials had been rising in the past year. Some of these costs had not been hedged and the company would suffer some margin erosion as a result. Real estate solutions revenue for FY 2008 was S$193.3 million, making up about 44.1% of total revenues for FY 2008, hence the impact of the margin erosion would be substantial. Moving forward, the Company has mentioned that it will use cost-plus pricing for its Libyan Township project, so as to mitigate the effects of rising costs.

However, the company has managed to actually reduce its selling and distribution, admin as well as finance costs even though revenues had increased. It is interesting to note this and is a clear indication that economies of scale are present to be able to allow the company to grow its top line without consequently increasing its expenses. Many companies show impressive top line growth of 80-100% only to see its expenses balloon about 300-400%, effectively negating the increase in revenues. Hence, as a result of this, Boustead’s net profit is up 45.7% to S$58 million, which exceeds the increase in revenues of 27.5%. Net margin increased to 13.2% from 11.6% in prior financial year.

Balance Sheet Review

Boustead’s Balance Sheet is one of the “cleaner” ones I have seen during my investing lifetime, as compared to my other companies as well. Most companies would carry significant amounts of debt, receivables or inventory in their Balance Sheet, which creates risk of uncollectibility (receivables), obsolescence (inventory) and high finance costs (debt). Boustead avoids taking on excessive debt and instead relies on short term loans (just S$5.8 million) for its contracts. In fact, long-term debt was paid off in FY 2008 compared to FY 2007, and total debt decreased from about S$20.4 million to just S$14.5 million. The company’s receivables also did not increase in tandem with revenues, but was only a 13.1% increase. Its inventories are kept low (S$8.8 million) and most of its current assets consist of properties held for sale as well as costs capitalized from uncompleted contracts (to be billed later on as progress billings). Hence, I would say the Balance Sheet is very “clean”. Current ratio had dropped slightly from 1.83 in FY 2007 to 1.67 in FY 2008, mainly due to an increase of 51.5% in trade and other payables.

Cash Flow Statement Review

It is very clear from the cash flow statement that Boustead generates a lot of cash from operating activities, as net cash from operations amounted to S$81.4 million, an increase of 70.7% from FY 2007’s net cash inflow of S$47.7 million. In a further testament to Management’s move to enhance shareholder value, cash flows were used to acquire shares from minority shareholders (S$9.6 million), which consists of acquiring the remaining 10% interest in Boustead International Heaters on June 20, 2007. Purchases were also made of fixed assets and quoted equities (available for sale investments) amounting to a total of about S$12.5 million, while the disposal of a property (warehousing facility at 40 Changi North Crescent) yielded a gain on disposal of about S$6.4 million (recognized in Income Statement) and cash of S$10.2 million. Overall, net cash outflows from investing activities amounted to S$10.1 million.

Clearly obvious too, is Boustead’s ability to fund their contracts and projects from operational cash flows, as the cash flows from financing activities do NOT include taking up bank loans or issuance of any form of debt securities. Neither does it entail the issuance of any equities or rights, which is admirable indeed. Many businesses (including those which I own) need to grow through debt and equity issuances in order to fund purchases of fixed assets which then help to generate recurring revenues, but Boustead is able to carry on growing its business purely on cash flows alone. During FY 2008, they paid down some long-term bank loans of S$8.3 million and also paid dividends to minority shareholders. The bulk of cash outflows actually came from dividends paid to majority shareholders of S$17.1 million.

Overall, the company is in a very strong cash position with a cash hoard of S$163.1 million, which the CEO had mentioned will be used to acquire businesses which generate a sustainable recurring source of revenue.

Part 2 will continue by reviewing each of Boustead’s divisions and commenting on their performance.