Sunday, July 31, 2011

July 2011 Portfolio Summary and Review

July 2011 was interesting as there was quite a bit of unexpected corporate news flowing from the companies which I own. This was surprising considering I only own 6 companies right now in my portfolio, one of which is a REIT. Also for this month, Suntec REIT and SIA Engineering released results which will be profiled in the respective company summaries below. Over on the political front, Norway suffered a horror terrorist attack on July 22, 2011 which highlighted just how vulnerable we all are to this kind of violence. Meanwhile, Spain and Greece continue to hog the headlines on their debt problems; and USA has decided to join the party with the Senate debating on whether to raise the debt ceiling to allow the country to borrow even more money. As if the amount they owe wasn’t obscene enough…..

On the local economic front, COEs and HDB resale prices have hit yet another high – it’s like a tired old stuck record when reading this kind of news. Nothing and nobody seems to be able to contain or control the raging increases in the cost of cars or of public housing, despite the many “draconian” controls imposed on the housing market in the past 18 months. With MAS tweaking their inflation forecast for the year from 4% to 5%, I somehow think that the economists over there are under-estimating the problem. As I mentioned before in a previous post, the combination of cheap debt and hot money will continue to drive prices up in the short-term beyond fundamentals. Therefore, for couples who wish to buy for the long-term, make sure you get a fair deal and stick to BTO flats if that is possible (i.e. income ceiling below $8,000).

There has been an addition in cost to my portfolio for July 2011, and this is attributed to an increase in stake in MTQ as a result of their recently announced acquisition of PSL (Premier Sea and Land). Cost has now increased from $210,000 to another new high of $219,000. As explained before, pending the refund of monies paid for my daughter’s hospital bill (through insurance claim which is taking forever to process), I shall not have very much more monies to channel into equities in the short term as I need to maintain a reasonable and sufficient cash buffer for emergencies.

Below please find my portfolio as well as corporate summaries for July 2011:-

1) Boustead Holdings Limited – On July 8, 2011, Boustead announced that its wholly-owned subsidiary, Boustead Projects, had entered into an S&P Agreement to sell a strata divided building to be constructed at 61 Ubi Avenue 1, for S$38 million. However, the sale will only impact FY 2014’s earnings. On July 22, 2011, Boustead Projects was awarded a Design, Build and Lease contract for Continental Alloys to build an integrated distribution and manufacturing facility at Jurong Industrial Estate. The facility will be completed in 2Q 2012 (which means costs will be incurred till then, after which recurring revenues will be recognized from rental income), and will take up 5,500 square metres. This latest contract brings Boustead’s industrial leasehold property portfolio to >90,000 square metres. Further on July 27, 2011, Boustead Projects was presented with two very prestigious awards at the Workplace Safety and Health Awards 2011. They are the WSH Silver Performance Award (third consecutive year running) and Safety & Health Award Recognition for Projects (“SHARP”) for zero accidents achieved over 1.5 million man-hours at its largest project – the $107 million Rolls-Royce Achord at Seletar Aerospace Park. I also attended the AGM held on July 29, 2011 and will do a post on it in time to come.

2) Suntec REIT – Suntec REIT released 2Q 2011 results on July 21, 2011. DPU for 3Q 2011 was 2.532 cents per share, a marginal increase over last year’s DPU despite the acquisition of 1/3 stake in MBFC. This was due to the DPU dilution arising from the issuance of new shares to fund the acquisition. Occupancy rates remained high for Suntec’s properties, though, and this should underpin the healthy dividends to be received every quarter. The dividend will be paid on August 29, 2011.

3) MTQ Corporation Limited – On July 6, 2011, MTQ announced a significant acquisition – that of Premier Sea and Land (PSL) and PEMAC for US$19.6 million. PSL provides oilfield equipment primarily used for drilling applications in Southeast Asia and has relationships with over 20 OEMs. PEMAC is a machining facility specializing in repair, retrofitting and component manufacturing of oilfield equipment and machinery and speciality fabrication. The acquisition was at 4.7x PER as PSL generated US$4.1 million worth of profits for FY 2010 (ended Dec 31, 2010). It was funded by US$5.79 million in cash and US$13.51 million in debt.

I also attended the AGM which was held on July 22, 2011, and took the opportunity to engage the Management on pertinent issues relating to the business; and to clarify doubts I had over recent acquisitions by MTQ for its Engine Systems Division as well as NMS and PSL. I will be summarizing the findings and thoughts on the AGM in a future post. I will also detail my thoughts on the latest acquisition of PSL and of MTQ gearing up into a net debt position to finance this purchase, among other matters. Some of my comments will be in line with a recent article by The Edge Singapore with Mr. Kuah Boon Wee regarding PSL as well.

*Please Note for MTQ – XD date has passed for MTQ and I have chosen to accept scrip, but the scrip dividend issue price has yet to be determined. Thus, for computation of XIRR returns as a benchmark against the STI, I had to assume that the dividend was paid in cash on September 16, 2011 in order to give an accurate XIRR figure. When the issue price of the shares is determined and I know my full allotment of scrip, the market value of my portfolio will then be adjusted for my September 2011 portfolio.

4) GRP Limited – GRP announced on July 13, 2011 that it was divesting itself of its 63.5% stake in GRP (China) Pte Ltd, which is its uPVC business division. The consideration for the disposal will be $1.92 million and GRP will book a gain on disposal of $313,327 for FY 2012. The rationale for the disposal was that uPVC has seen revenue declining for 3 consecutive financial years, and was also unprofitable and (I suspect) bleeding cash. Divesting it will free up GRP to re-focus resources on its Hoses and Marine and Measuring Instruments Division and also allow some working capital to be channelled back into the business. Overall, I see this as a mildly positive move but the financial effects are still unknown until the Company sends the Circular to shareholders seeking approval for the disposal in an EGM. Meanwhile, it is likely that FY 2011 results will be released in late August 2011.

5) Kingsmen Creatives Holdings Limited – Rather predictably, there was no news from Kingsmen Creatives for July 2011. Their 1H FY 2011 results should be released around mid to end-August 2011, and I shall be expecting the usual 1.5 cent/share interim dividend to be declared, barring unforeseen circumstances.

6) SIA Engineering Company Limited – SIA Engineering released their 1Q 2012 results on July 26, 2011. Revenue fell by 3.7% to $277.6 million, while net profit attributable to shareholders decreased by 3.8% to $68.1 million. If one-off items were excluded, then net profit attributable to shareholders would have decreased by just 0.7%. I shall not be doing a review on the results as this is just the 1Q results release. I skipped the AGM which was held on July 22, 2011 (same day as MTQ); and the dividend will be received on August 11, 2011.

Portfolio Review – July 2011

Realized gains have increased to S$62.6K due to SIA Engineering going ex-dividend on July 26, 2011 and Suntec REIT going ex-dividend on July 27, 2011. For MTQ, as I have decided to choose scrip dividend, I will not be recording any realized gains from dividends. When the scrip dividend is credited to my CDP account on September 16, 2011, I will automatically adjust my cost to reflect the reduction in cost arising from the scrip shares, and my portfolio market value will also account for the increased stake multiplied by the closing share price for September 30, 2011.

For the month of July 2011, the portfolio has increased by +0.5% (using XIRR in MS Excel to compute) against a 0.0% fall in the STI (flat); thus my portfolio performance has finally outperformed the STI by 0.5 percentage points. This was much better than June 2011, when the portfolio was on par with the STI. Cost of investment has increased from S$210K to S$219K and unrealized gains stand at +12.6% (Portfolio Market Value of S$246,500).

I guess I still have a “backlog” of posts especially the super long overdue Kingsmen Comprehensive Analysis Part 5, as well as the continuation of the Porter’s 5-Forces Series. Inadvertently, I started a new series on Annual General Meetings as well! I guess I have quite a bit on my plate to blog about but as usual the problem is time constraints due to work and family commitments.

August 2011 should be a fairly interesting month. I am expecting 1H 2011 results from Kingsmen Creatives, FY 2011 results from GRP, and quarterly results (1Q 2012) from Boustead. As MTQ only reports half-yearly results, I will have to wait till October for them to report 1H FY 2012 results. Of course, I am expecting dividends from both Kingsmen and GRP.

My next portfolio review will be on August 31, 2011 (Wednesday).

Sunday, July 24, 2011

The Annual General Meeting (AGM) Part 1

After attending more than my fair share of AGMs, I thought it strange that I did not write a generic post on how I usually prepare for an AGM, or how I go about extracting information and conducting due diligence during an actual AGM. It’s interesting because the process often involves not just being ready with the questions which you have prepared, but one should also carry with them the willingness to warmly engage Management in discussions on the Company’s prospects and strategies. It’s as much a human relations exercise as it is an exercise in financial and corporate (business) analysis. Of course, it can be argued that one gets better over time as one attends more of such AGMs and gets to meet their fair share of interesting and varied personalities, ranging from the downright unfriendly to the exceptionally warm. This post serves to highlight the preparatory efforts which I undertake before an AGM, an account of what to do during the AGM, as well as the follow-up required after the AGM to verify facts, collate information and glean valuable insights.

Part 1 will discuss mainly on the Annual Report, how to go through it, and what information to glean from it; as well as the preparation of questions and pointers to be brought up during the AGM. Part 2 will focus more on the AGM itself, including the proper decorum to observe, things to do and people to approach. Part 3 will wrap up with a discussion on the aftermath of the AGM and any follow-ups required, as well as how to analyze, collate and make sense of the information gathered in order to glean knowledge from it.

Preparatory Work – Receiving the Annual Report

Obviously, one could argue that the very first step towards preparing for the AGM proper consists of reading and downloading the Company’s latest full-year financial results from SGXNet. This is usually within a window period of 60 days from the date of year-end for the Company. For example, in the case of Boustead, their year-end was March 31, 2011 and results were released on May 26, 2011 (within 60 days) on SGXNet. The AGM, though, is usually held about 2 months after the release of the results; in this case for Boustead it will be held on July 29, 2011 (Friday). This means that four (4) months would have elapsed from the date of release of the full-year results till the actual date of the AGM. Note too that the AGM is almost always held on a weekday, therefore in order to attend, one must take leave if one is engaged in full-time employment. I try to do so as much as I can as this is a once-a-year affair.

For the Annual Report, however, it will usually be issued two (2) weeks before the date of the AGM. In my case, I received Boustead’s Annual Report in my mailbox on July 18, 2011 (Monday) but the online soft copy version was already available on the Company’s website as early as July 15, 2011 (Friday).

Obviously, one will not have the luxury of time to peruse through the Annual Report, as there are only about 12-14 days between the time of receipt of the Report, till the date of the AGM. Below are some pointers on the salient aspects to look out for in the Annual Report to cut down time taken for analysis.

Preparatory Work – Digging Deep into the Annual Report

The Annual Report (AR) is usually perceived as a rather daunting document, as thick as a small encyclopedia and filled with glossy pages lauding the Company’s achievements. Essentially, though, it has two main sections. I call them the marketing section and the financial section. Marketing section consists of full-page, mostly glossy photographs of the Company’s projects, products or premises, while the financial section is chock-full of numbers, tables, explanations and (obtuse) accounting facts and estimates. Most people who are not accounting-trained would tend to shift their focus almost exclusively to the marketing section, as the pages there are easy to read, usually in full-colour, presented in columnar format (for easy comparison) and the English used is not too archaic. For example, using Boustead’s FY 2011 AR as an example, the Group’s four divisions are clearly segregated and explained, and tables are used to summarize major projects and milestones for each division. There is a Chairman’s Statement which is 4 pages long, as well as a financial summary showing five years of revenue, profits and dividends. While I do not deny that this section can be used as the basis for questions, it is usually the stuffy numbers in the financial section which should be scrutinized up-close, and for a person without accounting knowledge this task would seem like a mammoth one. Therefore, I would strongly encourage readers to acquire a basic understanding of accounting by reading books such as “Value Investing for Dummies” which explains the key concepts involved in the three financial statements, as well as some other accounting concepts.

It would be a good starting point to concentrate on the numbers which “stand out”, meaning any big changes in profit margins, revenues or anything which is an aberration and not quite “normal”. What these are will, of course, vary from report to report, but they generally centre on the following:-

1) Significant Events - These include acquisitions and divestments during the financial year, and their effects would have been described in notes such as Goodwill, Subsidiaries, Associated Companies or Investment/Investment Properties.

2) Receivables - Bad debts being written off, more being provided for. A note on Receivables will usually contain a summary of these by ageing profile, and under Risk Management the auditors will also assess the fair value of receivables to ensure no (further) impairment is required.

3) Debts - This note can be pretty detailed for a company with significant loans, and will include comprehensive conditions on each loan, repayment amount, interest rates (usually Cost of Funds + Spread), currency and repayment period. These can give an indication of whether the Company needs to refinance soon, as well as give an idea of the finance costs for the coming year.

4) Subsequent Events - These include significant events which occurred after the financial statements were released but before the printing of the AR. Some of these may have a material impact on future financial periods and may give rise to questioning.

5) Investments and Investment Properties - For those analyzing an asset play, this note would be very useful. The market value of properties may exceed their book value and thus hidden value may be present in the properties which a Company has.

6) Commitments (Contingent and Capital) - These include potential liabilities which have yet to crystallize due to uncertainties such as lawsuits or corporate guarantees; as well as commitments for capital expenditure in the next financial year which may give a sneak peak as to how much cash needs to be channelled to these purchases.

There are, of course, other aspects which need to be looked at on a case by case basis, but the above is a simple laundry list of the more important notes to look out for when browsing through the AR.

Preparatory Work – Taking Notes

As one peruses through the AR, one should continually jot down notes on a separate piece of paper (or type it out if you wish) in order to organize your thoughts on what you wish to be clarified. Structure and focus your questions to make sure you tackle the crux of the issue and not just to scratch the surface. For example, a question on debt may require you to query on why borrowings had to increase so much when cash flows were actually healthy and seemingly sufficient, and at the same time, one can also ask about the cost of debt if Management is willing to reveal the blended yield for the Group.

Formulating A List of Questions

After reading through the AR and making notes, I will usually compile a more detailed list of questions for the AGM. These are categorized into business strategies, business divisions, financials and plans/prospects; but readers are free to choose a format which they are comfortable with. The key is to make sure you cover the points you wish to raise systematically, and to ensure you organize your thoughts well. This is because you will seldom be able to keep glancing at your list during face-to-face interactions as it may be construed as rude (more on this and other etiquette in Part 2). Try to remember key information such as net margins, important debt amounts, and other numbers such as revenue growth, profit growth, projections, numerical forecasts and dividend yields. This is not so much to impress Management but it also allows you to flow more smoothly from one question to another should you receive a reply which allows you to do so. Since questioning and fact-finding can be a fluid affair it is important to have some facts and figures at your fingertips in order to make the process a whole lot more efficient and effective. Remember too that Management has limited time to interact with shareholders and may have to rush off for some important meeting or do what they do best – work to grow the Company to greater heights!

Part 2 shall delve into the AGM proper as you arm yourself with your list of questions. It also describes basic behaviour to be observed, dos and don’ts and what else you should bring along.

Sunday, July 17, 2011

Boustead – FY 2011 Financial Results Analysis Part 3

Part 3 of my Boustead’s FY 2011 analysis will feature the entire transcript of Boustead’s FY 2011 results audiocast. As per prior years, I will be inserting my own thoughts and comments periodically throughout the audiocast session, and these will be indicated in square brackets [ ] and in blue. However, this analysis will be different from previous years in that I will NOT be sharing any insights from the Annual Report 2011. I will be splicing that into a separate post after I attend the AGM to be held at Starhub Green on July 29, 2011 (Friday) and combine my insights and remarks into one post to make it easier for readers (and myself) to digest. If the information is too voluminous (i.e. audiocast cum annual report), it makes it difficult to read on and by splitting it into two separate posts, I hope to be able to achieve better clarity and focus on these two separate yet connected events.

After the transcript portion, I will also discuss on plans and prospects briefly (as gleaned from the audiocast); but a more in-depth discussion of this will be provided after the AGM as I intend to touch on more detail during this event.

Boustead FY 2011 Audiocast Transcript (recorded on May 26, 2011)

Question (Tan Choon Kiat): I noted that the geo-spatial division has performed very, very well. And that is despite, you know, we sort of like was saying the growth of this division would plateau off. But it doesn’t seem to be so, in fact the geo-spatial division grew nearly 30%. Eventually, out of this 27% PBT growth, how much would you attribute to favourable currency effects, and also specifically, what is the sustainable long-term growth (for this division) in the next 3-5 years which your team is actually looking at? The other thing, of course, the recurrent part of the real-estate portfolio that you guys have been building up is looking very nice and is steadily growing notwithstanding the fact that the size of each project secured is becoming a bit smaller. My question right now is a very pointed one – it appears to me that looking at these two divisions alone, the profit before tax (PBT) of these two units seems to be hitting $35 million and is still growing.

FF Wong: First question first, Choon Kiat, Geo-Spatial. The main reason for the growth in this financial year was not really because of the currency. In fact, it is because of the growth of countries outside of Australia, especially Singapore, Indonesia and Malaysia too. And the other thing is the maiden contribution from Mapdata Pty Ltd which was acquired two years ago. So these are the two main reasons. You asked also whether it is sustainable. It appears to be sustainable because over the years there has been steady growth, even though percentage-wise it was not to my liking, or to shareholders’ liking. But that’s also because the Australian market is maturing, and yet we haven’t really been able to quicken the steps of development especially in Indonesia. So we have been putting in serious effort in growing the markets outside Australia and it appears that it’s bearing some results, and as you know Indonesia is so big, and with the current craze in resources development, mining and so forth, we see huge potential in Indonesia, and we have also embarked on non-traditional methodology to expand the market instead of following the standard global ESRI methodology. That, I believe, should be able to give us some quantum leap with respect to the growth in those respective countries like Indonesia. I firmly believe that our growth and our revenue in Geo-Spatial will be sustainable. Next question on industrial real-estate. The size of the projects are a bit smaller principally because in the year before (2009) when we secured Rolls-Royce projects, these two projects are huge (humungous). So, by comparison with the usual industrial building projects, these are unlikely to be repeated in future from what I can see, but who knows? But there are a lot more projects in the marketplace. We have secured quite a number, especially in the last 3-4 months. I would think that there are also a lot more design, build and leaseback projects – we are negotiating quite a number of them quite near closing stage but not quite yet, so can’t make any announcement as such yet but the pipeline is very healthy with respect to design, build and leaseback. That’s not included in the order book (in the backlog). Yes I think that’s about it, I hope I have answered your questions. You can pose another question later on.

[It would seem that Geo-Spatial still has ample room for growth, even after the seemingly sharp jump in revenue and profit before tax of 26% for FY 2011. Boustead’s efforts to expand beyond Australia and into Indonesia seem to be bearing fruit, and according to FF Wong Indonesia still holds untapped potential for this Division. It’s good to know that Geo-Spatial, being Boustead’s cash cow, can continue to be milked and that the tap would continue to gush for many more years to come!]

[As for Real-Estate Solutions Division, note that FF Wong mentions that “quite a number” of DB&L projects are being negotiated, and are “near closing”. If we look at the announcement pipeline for this Division since the audiocast, there was only one announcement of a Design & Build contract worth S$23 million for Bell Helicopter; so I am guessing that these DB&L contracts are probably still under negotiation, and may be announced perhaps in August 2011 (if we look back at 2010 there was one D&B contract announced then as well as one DB&L)]

Question (Mr. KK Phua): When is the AGM held (the actual date)? I would like to make myself available to attend.

FF Wong: We have not actually fixed the date yet, but from our previous practice, it is likely to be end of July 2011.

Question: Do you foresee any further recognition of losses arising from the civil war in Libya?

FF Wong: We have done a complete review with our lawyers. We believe that our present recognition of losses and provisions should be sufficient but then again, of course, it is a long tedious process. We are not 100% sure but we are confident.

[Disappointingly, on June 24, 2011, Boustead announced that there was possibly another S$23.3 million worth of exposure for Libya as a result of a litigation involving corporate guarantees given by the Group. It seems that Libya is turning out to be a very painful and long drawn-out mistake for Boustead]

Question: Previously, you estimated the maximum Libyan exposure at $39.6 million. The provision this quarter is about $14 million. How do you view the risk of the other exposures? Would there be more provisions in the next financial year?

FF Wong: I think we just answered this question. There is about $24 to $25 million exposures in performance guarantees. We have altogether made $19.1 million provision for the whole financial year. We believe that is sufficient – as mentioned we have consulted our lawyers and have taken advice from them.

Question (Francis Teo): What is your opinion of the investment in Hankore (i.e. Bio-Treat) so far?

FF Wong: Our investment in Bio-Treat is relatively small, it’s only $4 million. We like the Management, and we have been interacting with them for nearly a year and we think that this new Management are sincere people and they are good in what they are doing. The only thing is they will be embarking on BOT projects. The business model is something which I always find not quite attractive for us, however, they have a huge network especially in China (in this industry). We feel that there is a need for them to make use of our expertise, and being associated with them will help us to open up opportunities in China, especially in areas where they do not have experience and expertise, especially in seawater desalination, pure water purification and also in industrial water treatment applications for power industries. Being associated with them, I think, is a good move.

[Somehow on Hankore, I feel that FF Wong may be investing that S$4 million more for “relationship management”, rather than through a rational and objective assessment of the business which yielded solid prospects for the business. From what I can observe from the Balance Sheet and Cash Flows of Hankore, it will probably be an uphill task for them to achieve decent profitability and sustain it through more than a few quarters. This is due to the BOT business model which requires huge upfront capex. Even though the investment is “only” S$4 million which is a paltry sum compared with Boustead’s cash hoard, it’s the principle of the matter and I certainly hope FF Wong does not let this S$4 million dwindle into something a lot less!]

Question (Desmond Wee): With regards to working capital requirements, what is a current ratio that Management is comfortable with?

FF Wong: Very good question! We are principally an engineering company. There are a lot of opportunities in this region, and some of these infrastructure projects are so attractive we would like to keep a healthy cash balance in the bank so that we can capture these opportunities as and when they occur. In other words, we are rather flexible here. I always maintain we would like to keep ourselves cash-rich so that we can capitalize on the opportunities available.

Question (Desmond Wee): Can you identify the investments made in 4Q FY 2011 (the $16 million non-controlling interest, $6.4 million trading investments and $1.5 million available-for-sale investments?

FF Wong: The $16 million I believe you are referring to the remaining 8.3% shareholding in Boustead Projects. With the acquisition of that interest, we will end up with 100% control in Boustead Projects. The $6.4 million trading investments are relating to the purchase of corporate bonds which give us a pretty attractive yield as compared to so much money sitting in the bank giving us 0.1% yield. And $1.5 million, these are the convertible bonds.

[A minor note here – FF Wong was very sharp to buy over the 8.3% stake as I believe he is aware that Boustead Projects is gearing up for greater things in time to come, so it’s good for Boustead to be able to consolidate 100% of the earnings instead of letting part of it be shared by the non-controlling interest. As for the corporate bond investments, it would be interesting to find out what is the blended coupon rate on this investments, and whether the risk of default is high on those bonds?]

Question: How’s the economics of design, build, lease, sell projects so far in terms of margins, return on capital etc?

FF Wong: It varies. For design, build, lease and sell projects, there isn’t any fixed margin per se. However, the economics (if I can understand you correctly) obviously it will be better for us if we are able to secure design and build projects that cater for MNCs, generally we will be able to get cap rate there when we sell out to the REITs or property trusts. You work on cap rate instead of design, build – that would be on the basis of EPC, generally your margin will be (of course it varies from) 10% to 20% these days, being so competitive. In the case of IBM, I think you can read from the Balance Sheet. Our investment was $46 million and we were able to re-sell it back to IBM for $68 million, so we net a profit of $22 million. So you can work out the economics, $22 million against $46 million is nearly 45-46%; so that depends on what base you use. If you use 68 as the base, then it’s 40-odd percent.

[Apparently, the margins are indeed pretty good if there is strong demand for a piece of property. On July 8, 2011, Boustead announced the sale of a yet-to-be-built strata divided building located at 61 Ubi Avenue 1 (incidentally, this is located beside Boustead House), for a cash consideration of S$38 million. It was not stated if Boustead was also responsible for building this, and what is their cost of building it]

Question: You said that you hope to leverage on Hankore’s network in China to land some projects (different kinds of projects). Would you consider EPC or would you consider collaborating with them on a BOT basis?

FF Wong: Most of the people would know that I am pretty negative about BOT, because the cash flow is just no good, and if you notice the Company emphasizes so much on cash flow. BOT is not the type of business model we prefer. Of course, there are exceptions. At the moment in China, it’s so competitive and there is so much money going around. It’s difficult to get BOT projects that would interest us. However, EPC yes, especially in areas that we can compete. I early on said desalination projects, demineralization projects, pure water projects, projects for more sophisticated applications where very few Chinese competitors have acquired the skill and the expertise (as well as the track records). We have been invited recently to bid for a water treatment project for nuclear power plant but unfortunately we are tied up here. We are working on a big project over here so we thought perhaps we will leave it to next time.

Question: Over the years, we have been talking about new areas which Boustead will be looking into. In fact, I think Boustead’s history has been checkered by a lot of hits and misses. This year we really had one big miss after what we thought had been a big hit back in FY 2007. I think everybody acknowledged that. Nevertheless, I always salute the spirit of the Boustead team when it comes to looking into new areas and ventures and executing them. At the moment it looks as if there seems to be very new ground that the Group is actively looking at. We have read in the various media through your interviews with magazines like The Edge that you have been busy looking for these new opportunities. Indonesia is actually one area, Vietnam is another area. If I remember correctly, in that interview, there has been some mention about looking at infrastructure projects that are resource-based in Indonesia. And also, I think, Boustead has a presence in Vietnam for quite a while now. Vietnam has always been {not audible}, notwithstanding the volatility of the currency. So would you care to update about two new markets? Indonesia and Vietnam and perhaps some other regions where there is something that is actually coming through materially. Also, on top of it, I was also looking at power plant potential in Indonesia. Could you elaborate on what you will be focusing on and will it be contributing to the current income meaning it could be BOO or just an EPC type of project?

FF Wong: It’s a very long question but I’ll try, I’ll try. First of all, Vietnam. We have secured a small project recently under Boustead Projects. It is a construction project – not very big but it’s the second one and going on pretty smoothly. That’s one; we’re still working on an interesting project. It is – I don’t want to be too specific, but we have been working on it for 2.5 years. We’ve been promised the project; it is a BOT project but though we have got supposedly all the approvals but the approval process is so long. Until today we haven’t been able to complete it. We were told that we definitely have secured the project but it’s not coming, so frankly I have lost a bit of interest there. I thought I had lost all interest but surprisingly, coincidentally, yesterday we had just been notified that the license had been issued. We need one final presentation on the technical arena. Our guy is going to Vietnam, Hanoi, next week and hope that this will be the last hurdle. But I can’t be sure exactly because in Vietnam, with the bureaucratic complexity. In Vietnam, we are still looking at a lot of other projects. I will not say “die”. Indonesia, we have been very active in Indonesia, especially myself, in the last year or so. Yes you are right, we are looking at infrastructure projects with respect to resources development, including mining. We hope that soon we will have some good news to share with you all. And these are the projects that will give you recurring income. It’s supposed to be closed yet not yet there, a bridge too far perhaps; let’s keep our fingers crossed. That’s all I can disclose to you. I would not let our setback in Libya deter us from venturing into countries which give us tremendous prospects. I do know that some of you who are not used to working in emerging economies, you may be frightened but it’s all a matter of matching your exposure. In the case of Libya, we were carried away with the early successes in Libya – in fact we were doing quite well in Libya. We had put in a lot of claims and the project team had also agreed and approved (supposedly) these claims to be submitted to the authorities. All of a sudden the war broke out – what can I do? Perhaps you can say that with respect to our Balance Sheet, we probably put a bit too much in Libya. We knew about that, however, which was why we brought down our equity participation from 65% to 35%, but the implementation (process) of transferring the money out just took too long, and the war just broke out. Have I answered the question(s)?

[From the reply above, it would seem that FF Wong has got quite a bit on his plate, but these various initiatives have yet to pan out successfully and thus he cannot elaborate more specifically on them due to their market-sensitive nature]

Question: But Mr. Wong, yeah yeah you have answered the questions. But let me put it this way, I think in businesses, it’s not always smooth sailing. So don’t get us wrong, as shareholders we know your team’s track record. As long as we can make good with 1 out of 5, I think that’s life, life just has to go on. No worries about that.

FF Wong: Thank you. But I think if you look at the presentation with Keith, you’ll notice in the last 7 years we have been able to achieve from 20% to 30.9% on your ROE. And that’s even with that sort of equity base which is inflated by the cash hoard. If we were to take the cash out, you would notice that our ROE has been very, very respectable.

Question: Yes, we have no doubt about that. Being shareholders in this company for coming close to 9-10 years, we have already seen the company growing from strength to strength. Let us be forward-looking in terms of what the recurrent business is actually showing, it’s already giving us quite a fair bit of comfort, and with your initiatives which have been put in, I think we definitely have good years to look forward to, as long as all the execution and processes have been well-contracted. That’s all I have to say. Thanks for all the efforts.

FF Wong: Thanks Choon Kiat.

Question: Sorry to bug on the current ratio, but I was thinking that the net cash position is a little misleading, since when the cash is removed, the current ratio falls to about 1, which seems tight. So I was wondering if Management can give a rough figure on what current ratio is comfortable for them, and how much of the cash is ready for deployment in investments?

KK Loh: Hi Desmond, this is KK Loh and I will take your question. If you dissect your analysis, let’s just have a common understanding. In the Balance Sheet, if you remove the cash, current assets will drop to $226 million; but correspondingly, for current liabilities you must remove the borrowings which will fall to $219 million, so the current ratio will be about 1.03. In our borrowings of facilities with the bank (credit facilities which were obtained from the bank), the bank is comfortable with a current ratio of 1. And in FY 2010, our current ratio was 1.78 and in FY 2011 it was 1.95; and dissecting the net cash position, it’s $184 million. But actually cash in the bank is $210 million, we net off $3.5 million of unsecured debt and long-term debt of $21.6 million which would not payable in one year. Looking at it we are quite comfortable, but you are asking is how comfortable we are with our current ratio. I think it all depends on whether we have enough facility to gear. If you can borrow to the hilt (the exposure), and you have good businesses, why not? But at the present moment, we are cash-rich so I think that is not our problem in terms of the ratio. Hope I answered your question. Thank you.

------------End of Transcipt----------

Plans and Prospects for Boustead (based on audiocast)

1. There was not much mentioned about Energy-Related Engineering, and the press release itself alludes to high oil prices benefitting this division, though growth was not expected to be significant. It would seem that short of a significantly large M&A for this division, there would be limited growth and I expect it to just plod along. Though it is expected to be profitable, I cannot see any catalysts which could spur a jump or permanent spike in revenues and profitability as most of the revenue is contract-based and therefore lumpy. Assuming Boustead is able to re-structure all units successfully, perhaps the increased efficiencies and economies of scale could improve margins further for waste to energy projects, but let’s wait and see.

2. Notice that almost nothing was mentioned or asked about Salcon (Boustead’s water and wastewater division)? It seems that after announcing the termination of the project in Libya due to the civil unrest, Salcon has not come up with any meaningfully large contracts, or even small ones for that matter. Interest in this division has also gradually waned as the turnaround had probably taken too long and there is no confidence in the division being able to sustain profitability after the Libyan blip. I guess questions about Salcon would be reserved more for the AGM rather than the audiocast.

3. The Real-Estate Solutions Division appears to be headed in the right direction, with FF Wong alluding to more deals in the next few months and a build-up in Boustead’s recurrent income flow through more DB&L projects. The fact that Boustead Projects can cater to niche markets bodes well for the now 100%-owned subsidiary, as this means more projects of significant size and clout would raise its profile and create a positive feedback loop. It remains to be seen if the division can manage to scale new heights in terms of revenue and profit contribution, as a large portion of its contracts are “lumpy” as well; but with FF Wong’s assurance that he is building up the DB&L orderbook flow, this may mean that revenues and cash flows at Boustead Projects would become more stable, consistent and predictable. One positive side effect is that dividends may also increase as a result.

4. Geo-Spatial can be classified as a slow performer, and is usually under the radar when it comes to shareholders asking about Boustead’s performance. I guess it can be classified as the least “glamorous” of the 4 divisions and many (including myself) do not fully understand the technical aspects involved in this division’s services being provided. It is evidently the cash cow division of the Group as it has high barriers to entry, high gross margins and very healthy cash flows (as most of its customers are government agencies and thus have the ability to pay). In terms of projected growth, unless another good acquisition like Mapdata Pty Ltd comes along, I would expect a 5-10% slow but steady growth for this Division. I will not rule out a possible collaboration or M&A for this division though, knowing how Boustead can evolve and continue to leverage on emerging cutting-edge technologies to enhance the user experience (with being launched recently), I feel this division has the latent potential to grow further, just that it requires patience and time.

5. On the investment front, it appears that Bio-Treat’s investment in Hankore will be a very long-term strategic kind of partnership, as FF Wong himself alluded that he does not take too well to the “BOT” business model for Boustead itself; but is somehow willing to invest in a company which derives the majority of its revenues from BOT projects. Granted, Hankore does have many concessions in China and the most recent announcement from the Company was that it had inked a strategic cooperation agreement with the Xianyang City Environmental Protection Bureau and was granted the preferential right to invest in environmental projects with value not less than RMB 1 billion. At the same time, on July 13, 2011, Hankore also announced a new substantial shareholder Firstree Group Limited which purchased 338,374,474 shares (8.17%) at a price of 5 cents per share. This is 20% higher than Boustead’s 100 million share investment at 4 cents per share, and makes Firstree the second largest shareholder of the Company.

6. Boustead’s ongoing cash management program is seeing the Group invest in corporate bonds, and utilizing their idle cash to generate returns at least above inflation. While the exact returns are not known, my understanding is that they invest in short-term liquid corporate bonds which can give a decent yield; but which also probably have a probability of capital loss. It will be good for me to clarify this point with them during the upcoming AGM.

My analysis above is predicated on the fact that some queries need to be raised during the AGM, and more questions will probably need to be raised as well after browsing through the Annual Report 2011 in greater detail. But for now, these are my observations and my accompanying analysis of Boustead.

Tuesday, July 12, 2011

Personal Finance Part 23 – Functional Versus Status Items

Looking around me daily at Singaporeans around me on buses and the MRT, I have come to realize that possessions do indeed constitute a form of “signalling” to tell others more about yourself. Whether it be branded goods, an iPod or a luxury car, all these material possessions are a way of declaring your financial status, or in some cases, showing off how indebted you really are! I was mulling over this over the last few weeks, and decided to write something on it which is appropriately titled “Functional Versus Status Items”. I will seek to explore items which many possess which can be classified as just being functional, as compared to having some sort of status attached to it. For each category, I will state the functional items within and the approximate cost, then compare this to a similar “status” item and state its cost as well.


Clothing is arguably one of the true bare necessities of life, other than food, water and air. For to be clothed is to be protected from the elements and their harsh effects, and to prevent our skin from the harmful effects of radiation from the sun. But for some, clothes are also used as a means of expression of taste, style and individuality. For myself, I usually dress in a simple T-Shirt with Bermudas or for working sake, long-sleeve shirt and long pants. These are usually not branded and the long pants are from G-2000. Functionality would be simply to make one look presentable and to ensure one gets protection from the elements, but for people going after status, they could spend in excess of $150 for a shirt and probably $200 for a pair of “branded” pants. For my shirts, they are mostly in the $30 to $500 category and for pants, they range from $49 to $69 at G-2000 sales (GSS is still on as I type this). Thus, one could conceivably spend 2 to 2.5 times more buying branded clothing as compared to non-branded ones.

For casual wear, bermudas for me usually cost $30 to $40 a piece while T-Shirts can be from various tourist destinations like Redang, Phuket or Cambodia and cost less than S$5 a piece. I am not aware of the cost of a similar “status” T-Shirt and Bermuda but I am sure it could be more than twice or thrice the amount.

Spectacles (and LASIK)

The basic aim of spectacles is to improve your eyesight, but there are those who would make a fashion statement out of it nonetheless, which truly baffles me. Most of the time, I would visit my nearby neighbourhood spectacle shop to have a pair of lens and frame made for about $200/-, but moving around the MRT I have seen young adults wearing a particular brand of Emporio Armani spectacles which I guess could cost in excess of $500? The frame is thicker closer to the lens and has the symbol of the black eagle on white, and it looks more sturdy than normal frames, but otherwise still manages to sit on the bridge of the nose and enables the eyes to focus through the lens. So functional versus status implies a cost saving of about 50-60% in this instance.

And for those who do not wear glasses, ask if they have gone for expensive LASIK treatment to permanently correct their eyesight. The treatment is much cheaper (and safer) now (compared to 5 years ago) and costs probably around $999 per eye, for a total of about $2,000+ (including eye-drops and follow-up clinical sessions). The reason I avoid it is not because of the cost (pretty expensive in my opinion and no guarantee of permanent freedom from short-sightedness as it can still relapse), but also due to safety issues such as blurred vision and complications. Call me risk-averse but I’d rather save my money and my potential anguish and stick to my tried and tested spectacles.


I lumped these three items together because they usually come together when one shops, especially for men. I tend to buy a new bag cum wallet and shoes at the same time if I need a change, but I know women probably have very different shopping habits. For functionality, a wallet is simple a place to store your cash, credit cards and coins; while shoes are to protect your feet. Yet many also choose to indulge in the status aspect of wallets and shoes. For ladies, the most obvious would be the purchase of a branded handbag, be it Coach, Prada, Miu Miu or the ever-famous LV. This aspect differs from that of men as women usually tote their bags around and having a beautiful label usually boasts of spending power and wealth. Such bags can cost in excess of a few thousand dollars, compared to the around $100 discount handbag (which may be a remnant of last season’s fashion statement, perhaps) which my wife purchases at Robinsons or Isetan. So that is a premium of almost 30-40 times just to “look good”. Wallet-wise, I stick to Braun Buffel around $98 as it is made of good leather and has enough compartments + an easy to access coin pouch. I’ve seen more branded wallets such as LV going for a few hundred, so I figure I’ve saved about 50-60% by sticking to functionality over status.

As for shoes, my belief is that they should look decent for work, and for leisure they should have the effect of protecting you from many hours of walking (yes, I am a walking freak). Thus, a decent $49 to $69 pair of black working shoes will suffice from OG or Robinsons (during a sale). The more expensive working shoes can cost up to $89 to $149. For casual shoes, I buy those costing at most $89 for decent comfort and soft material, and I guess in this area I don’t save that much; but brand wise it is not anything status-related like Hush Puppies.

Mobile Phone

Oh, now we have come to the mother of all status items – the mobile phone. This probably constitutes the most pervasive and conspicuous status item which everyone on the street is carrying but which not everyone is aware of. Most of the newer models of smartphones (including Blackberry, iPhone 4 and Android-based phones) are considered status items as they include functions like surfing the net, taking photos, downloading music and other nifty programs. To me, a phone is basically a tool for communication; thus the basic functions would be to call and SMS. Hence, I have retained my 5.5 year Nokia model from the dinosaur era and it still works very well, has a decent battery life of 2-3 days without recharging, and can withstanding quite a few occasional knocks without complaints. My phone came FOC (of course) with a new contract donkey years ago, while the new smartphones like iPhone 4 usually come bundled with data plans and cost $400-$500 upfront with a $49 monthly subscription before GST. I think I probably saved about 60-70% in the long run in terms of total costs by avoiding functions which I can live without (like MSN on the go and updating Facebook with every single morsel you chew on).

This also happens to be (unsurprisingly) the item which everyone else seems to badger me about. In order to keep up with the crowd and the so-called “status” of being a manager, I am constantly asked to upgrade to a snazzy-looking smartphone by concerned colleagues and close friends who hand me that “oh you are so pathetic” look. Trying to manage the handful of them has kept me busy enough without even considering the upgrade to a “better” phone (no, this is NOT a joke). After some moments of reflection and intense contemplation I concluded that I did not need those functions anyway and I was very contented with my Nokia phone, and I remain happy and satisfied to this day. The “harassment” continues unabated, however, but this is part and parcel of living in a society which places “status” over “functions”.


The basic function of a watch is to tell the time, but as usual there are many functional watches and there are also many status watches. There are some who argue that watches like Rolexes constitute a viable investment, as their value will not depreciate and it can be handed down to the next generation. But for myself, I used to own a watch which told the time but ever since that broke down, I relied on my (old but trusty) mobile phone to remind me of the time; and those who see me in real life will not that I do not wear a watch, and have not been wearing one for more than a year. I still am punctual for all my appointments and am hardly, if ever, late for work; so it’s a matter of discipline and having that innate sense of time and how long it takes to engage in certain activities.

Status watches can range from anything around a few thousand to hundreds of thousands of dollars, so I will decline to speculate on how much I saved by not owning a watch; but you get the idea.


Well, I could go on, but I think the above is a simple laundry list of items which one can choose to be purely functional, or having some sort of status element attached to it. Some may even argue that a hybrid exists – functional items with a hint of status (mid-range watches and wallets), and I do not deny this. For myself though, I am a bare necessities guy and I hardly spend on anything deemed status-worthy, thus this post is just to share how much one could save if one drastically cut down on his status “wants” and lived a simple yet fulfilling life based on family, friends and relationships. Possessions may fade but the joy of experience persists – clich├ęd but very true in my opinion!

Wednesday, July 06, 2011

Boustead – FY 2011 Financial Result Analysis Part 2

Part 2 of my Boustead’s FY 2011 analysis will touch on divisional analysis, and will also provide some insights into Boustead’s varied divisions and talk about the prospects and plans for each. I guess I have probably done this about three times already in the past, but please bear with me as I feel that this is an essential part of the analysis as it seeks to break down the financial results into divisions; and for Boustead its divisions are so diverse that each should be scrutinized on its own merits. I will do the usual divisional breakdown analysis, as well as the margin analysis for each division; and add in my own comments and views.

Divisional Revenues Breakdown and Analysis

Glancing at the table above, it can be seen that Boustead had managed to grow revenue for Engineering Services to new heights, as a result of steady oil prices and a burgeoning order book for their Real-Estate Solutions Division. Sadly, Salcon did not do well due to slower recognition of projects, and there was also an absence of a large contract like the one for Toshiba Corporation in FY 2010. The boost in revenues therefore came mainly from Energy-Related Engineering, rising 15.2% to $140.9 million, and Real-Estate Solutions Division, rising an impressive 61% from $183.7 million to $295.7 million. This was despite the lack of recognition of any revenue at all from the (now) suspended Libyan Township Project (Boustead Infrastructures) due to the ongoing civil war conflict. Boustead’s Oil and Gas Division continued to do well as oil prices remained firm and their downstream services were very much sought after. In spite of a “subdued” performance from their upstream business and solid waste recovery business, the division still managed to post a rise in revenues year-on-year.

One would notice that Real-Estate Solutions Division now takes the lion’s share of revenue, as a proportion of Engineering Services Division. It made up 63.6% of revenues as compared to just 50.9% a year ago, and I am confident that this is the reason Boustead decided to buy out the minority interest in Boustead Projects (of 8.3%) during FY 2011 and make Boustead Projects a wholly-owned subsidiary. As a proportion of total revenues of $560.6 million, Real Estate takes up 52.7% of total Group Revenue, up from just 41.9% a year ago. This attests to Boustead’s strategy of focusing this division on a niche market in which it can compete very effectively and “lock-in” good margins. Boustead Projects is also building up its portfolio of Design, Build and Lease (DBL) projects which provide recurring income and cash flows, apart from just bolstering their Design and Build order book.

A somewhat surprising result also came from Geo-Spatial Division, which saw revenues increasing 26.6% from $74.8 million to $94.7 million. The major contributor to this was Mapdata Pty Ltd which was acquired in FY 2010, and FY 2011 saw a full-year contribution from this subsidiary. I have always maintained that this division is Boustead’s “Cash Cow”, and so I had expected slow but steady growth of 5-10% per annum; so I guess the results more or less blew me away! I do feel, however, that this may just be a one-off “spurt” due to the recent acquisition, and growth will likely moderate and slow down into either single-digit, or at most low-teens by FY 2012. Of course, as long as the division continues to generate tons of free cash flows, I for one will not be complaining.

Divisional Margin Analysis and Review

The numbers in the above table show throw up some very interesting observations. I guess it really pays to look deeper into the margins per division and not just rely solely on revenue figures and revenue contribution, as that only tells one side of the story (and not even the most important side). This is because margins often give a more detailed insight into what is happening within a division or company, and can offer tell-tale signs of trouble if one knows how to read and interpret the information.

Note that for Energy-Related Engineering Division, PBT margins were actually lower for FY 2011 (at 12.1%) compared to FY 2010 (at 16.3%). As a result, the increase in revenue of 15.2% was negated and PBT fell 14.6% to $17 million. No specific explanation was given either in the press release or audiocast as to the reasons behind the margin erosion, but I suspect this could be due to the nature of the contracts, with most of them being from the downstream oil and gas division which may command lower margins. For FY 2010, it could be that higher margin contracts were secured by other sub-divisions and resulted in a mix which yielded a higher PBT margin. Though contract flows are likely to remain relatively healthy due to the resilient oil price, I am concerned as to the sustainability of margins and whether they can improve back to FY 2010 levels; hence I will probably raise this as a pertinent concern during the upcoming AGM.

Water and Wastewater Engineering Division was actually doing somewhat decently before the massive write-offs due to the Libyan conflict. Boustead reported that PBT would have been $3 million if not for the write-offs, so based on a revenue base of $28.7 million, that would yield a PBT margin of about 10.5%, which is lower than last year’s 14.2%. Still, I take comfort in the fact that the Libyan write-off is a one-time adjustment and that Salcon is still managing to remain profitable in spite of stiff competition and niche focus. I had originally harboured hopes of seeing Salcon report three consecutive years of profits but as a result of the write-offs, this was not to be. For FY 2012, I am optimistic that the division can get past its troubles and shine again under the capable leadership of FF Wong.

Real-Estate Solutions Division had its results somewhat distorted by the sale of property to IBM, so the 61% surge in revenue must be adjusted for that. The PBT margin had improved to 12.8% which shows that the division is performing robustly, and notwithstanding the distortion the division has also built up an enviable track record of handling niche projects in the aerospace and electronics industries. The Division has, since the release of its FY 2011 results, secured more D&B projects as well as a few DB&L projects, and is on track to continue to grow its base of recurring income and cash flows.

Geo-Spatial Division was relatively stable in terms of margin performance, and netted a very high 25% PBT margin. Hence, growth would only come from top-line as the division expands through either acquisition or strategic alliances. This cash-cow division of Boustead has been performing well since Day One when I became a shareholder, and I suspect a lot of the dividends have come from the steady performance of just this division alone, against the more volatile results of the other three divisions.

Prospects and Plans by Division

I could probably provide a more comprehensive commentary on the above if I had attended the AGM, and if the Annual Report 2011 was in front of me! Nevertheless, I shall summarize the strategy for each division based on information which is already available.

For Energy-Related Engineering, Boustead will continue to focus on its upstream, downstream and waste to energy units to get them running on full throttle. Somehow, I feel that these three sub-engines have yet to run at full steam, thus depriving the division from realizing its full potential. With oil prices are a recent high (though they have somewhat moderated), this should bode well for this division and it has secured about $45 million worth of contracts for FY 2012 thus far.

Salcon is an enigma, to me at least. It’s tough to figure out if it does indeed have the competitive advantage which it touts, in order to bid for specialized projects which are very different from the BOT or BOO model which traditional water treatment companies go for. It also has the likes of Hyflux and SembCorp Industries as major competitors to contend with, so I really cannot tell if the division will continue to do well. Rather than struggle in its uphill task, my thoughts are that Boustead should consider divesting this division and focusing on the other three instead.

I guess Boustead Projects (now 100% owned) should continue its trajectory of contract wins, and I feel confident that this division can sustain its revenue levels and also generate good cash flows. Boustead Infrastructures is almost a complete write-off due to the problems in Libya, and with the additional exposure for Boustead due to the corporate guarantees, I do not see much light at the end of the tunnel. I guess Boustead would try to mitigate its loss where possible and recover as much as it can.

For Geo-Spatial, growth will definitely moderate as the effects of the acquisition tone down. But with sustained demand and good margins, this division should continue to perform well. There have been no specific plans mentioned to grow this division but I will find out more during the upcoming AGM.

Part 3 of this analysis shall present the full transcript of Boustead’s audiocast, and also include my comments on various sections of it.