Boustead – FY 2008 Financials Review and Discussion Part 3

This final section discusses the prospects of Boustead’s business units and also the plans put in place by Management to grow each division. A little of the macro-environment will be discussed as well as FF Wong’s view of how the company, as a whole, will explore new opportunities to further enhance shareholder value. This section was compiled from Boustead’s recent audiocast, FF Wong’s interview with Pulses Magazine in June 2008 as well as Boustead’s recent press releases and announcements.

Prospects and Plans for each Business Unit

Energy-Related Engineering

This division is expected to perform better for FY 2009 as the demand for Boustead’s services (waste-to-energy conversion and its boiler technology) continue to remain firm. The solid waste energy division is expected to contribute to a better performance after its re-structuring in FY 2008. According to the company’s forward statement, they have received numerous enquiries and are optimistic of converting a significant portion to contract awards for FY 2009. Soaring energy prices (oil recently hit a new record high close to US$147 per barrel as at time of writing) and demand for alternatives will ensure growing demand for Boustead’s services; and the Boustead boiler commands a premium as the company is renowned for its boiler technology and has an edge over competitors who may have bid lower but do not have the expertise.

FF Wong however, mentions that oil majors are delaying projects due to rising material costs and higher labour costs (resulting in labour shortages), so many projects are on hold at the moment and he is frustrated that deals which are being negotiated cannot be concluded. It will be possible, however, to pass the additional costs down to the customer level as inflation is driving worldwide prices higher. Hence, I prefer to remain conservative on the growth of this division and project only a marginal improvement of 5-10% for this division for FY 2009.

Water and Wastewater Engineering

The most notable recent win for this division was the announcement, on June 30, 2008, that Boustead had clinched a S$175 million wastewater project for the Libyan Township (which Boustead Projects is also working on). Boustead will take a 65% stake in this project and it is Salcon’s biggest contract win to date (at about S$113.75 million over 3 years). FF Wong had earlier mentioned a possible contract win in the Middle East and this has come to pass. Salcon is also working on a new cutting-edge technology using a commercial scale textile pilot plant in China, and have sunk in considerable amounts of cash into R&D. Hopefully, if this new technology is successfully implemented, it will give Salcon the competitive edge which has been so elusive all this while.

That said, FF Wong did reiterate that this division suffers from low barriers to entry and that there are many players; hence the poor margins. Lots of money may have to be spent before any decent returns come out of this division, and cost overruns tend to occur as a result of unforeseen circumstances. Closing down the Salcon UK office also took a toll on the division and further restructuring and streamlining is necessary before the division can see the light of day. I recall someone mentioning in a forum in 2006 about Salcon doing an IPO – I think those days are still very far away as a company will need 3 consecutive years of profits before it can even consider going for a listing. Now, the most important thing is to cut costs and work towards turning the division around. I project a 40-50% increase in revenue, but profitability is hard to forecast as per the reasons mentioned above.

Real Estate Solutions

Boustead’s order book has been growing steadily for this division, which includes Boustead Projects (specialized buildings and facilities) as well as Boustead Infrastructure (new Township). The recently announced slew of contracts is a good gauge of Boustead Project’s competitive strength and FF Wong had mentioned that in future, Boustead may tweak its business model by looking to purchase land stakes in countries such as Vietnam and China, which may present significant upside.

With the introduction of the Green Mark Scheme by the Singapore Government, Boustead is actively training its staff for this and will remain up to date when bidding for future projects. The key is to remain competitive and to innovate in order to stay ahead and to clinch future contracts. FF Wong also does not rule out potential acquisitions using Boustead’s cash hoard which will boost the recurring income for the Group, as a weakness with their current business model is that they rely heavily on project-based revenues.

Geo-Spatial Services

With the increasing need for governments and agencies for timely and updated information on geographical formations and maps, this division will show steady growth in years to come. FF Wong mentioned in the audiocast that they are working with PUB to try to come up with a consortium to market Boustead’s experience in the Middle East using this technology, but that will probably take a few years to bear fruit. He also dismisses the idea of selling the division since growth is pretty low (5-10%) because it is a good cash cow (unless someone offers an irresistible price !). Boustead is now the fourth biggest supplier of geo-spatial services in the world and over 95% of their revenues come from the government sector. The division will continue to explore new technologies to enhance its service offering, by developing them in collaboration with universities around the world or buying their licences from the West.

Conclusion and Summary

Boustead currently has a healthy cash stash to take advantage of potentially earnings accretive acquisitions during the sub-prime turmoil. FF Wong also mentions being adaptable and flexible in order to stay ahead and relevant in the current fast-changing society. Boustead has already started making inroads into Vietnam, China, the Philippines and Indonesia while the Middle East is set to become a major market for its infrastructure and engineering services. FF Wong’s vision is to grow the company steadily over the next 20 years till it becomes a regional MNC. With the man’s vision, strategic focus and track record thus far, there is a very high probability that he can pull this off successfully.