Saturday, December 31, 2011

December 2011 Portfolio Review and FY 2011 Year-End Review

For this year-end review, I will be doing a comprehensive review of various aspects of my portfolio, covering cost, yield and also benchmarking against the STI during various months of the year. The reason for this is to get a better understanding of how my portfolio has been growing to date and over a period of two years, and how my returns have been affected (if at all) by the recent crisis. Another aspect which I will be looking at is the benchmarking as it would indicate whether I should simply stick to index funds or whether I should doggedly continue my pursuit of analysing individual companies and investing in them. Obviously, if my stock-picking skills are so bad that they stink, I would be better off saving my own time buying into ETFs than wasting it on futile analysis. At the same time, at the end of each section, I will also include my 2012 plans and aspirations.

Portfolio Growth

Portfolio growth tracks the growth in my portfolio over the last two years, and it was interesting to compile this to see how I had injected money and taken money out during this period. I started the year 2010 with a portfolio cost of about $151,000, and at the time the market value of the portfolio stood at about $160,000, with a gain of 5.9%. A total of about $51,000 was injected into the portfolio during 2010, and though it looks like there were no withdrawals, a quick glance at last year’s portfolio summary actually showed two divestments – one of FSL Trust and another of China Fishery (for a loss and a gain respectively). The proceeds were immediately reinvested into other promising companies, and 2010 actually ended with a portfolio cost of about $202,000 and an unrealized gain of 20.2% translating into a portfolio market value of $243,000 as at end 2010.

Looking back on hindsight, the performance for 2010 was way better than for 2011, largely due to the Europe Crisis which broke out in 2011 and caused a sharp fall in overall market prices. If we just base on share prices alone, the performance of the portfolio would definitely pale in comparison for 2011 compared to 2010, as the average gain was 13.7% for 2010 across twelve months, while for 2011 it is a mere 8.8%. But note that the money injected into the market amounted to about $40,000, which was comparable to 2010 if you factor in the turbulence in my personal life during 2011, as compared to a relatively calmer 2010. Of course, looking at the market value of the portfolio as at year-end 2011, it was severely affected by the economic turbulence and political uncertainty in Europe, and therefore just registered a gain of 3.2%, for a market value of $250,476.

Moving forward, the aim for 2012 is to at least maintain the capital injections (of around $50,000) as per 2010 and 2011, accelerating only if markets fall substantially, akin to the doomsday scenario of October 2008. From the lessons learnt from the last bear market, I have positioned myself to be always prepared for a major crisis with sufficient cash to take advantage of opportunities. At the same time, as an investor I have to continually keep a watchful eye on the performance of the businesses of the companies in which I own shares. Assuming I inject a decent amount into my portfolio, the cost by the end of 2012 should be around $300,000.

Realized Gains, Full-Year Dividends and Dividend Yield

From the above table, it can be seen that 2011 registered an overall realized gain of $5,600 from the divestment of Tat Hong and GRP. Recall that 2010 also saw a net realized gain of $9,400 but this was due to a larger gain offsetting a smaller loss (gains from China Fishery offsetting losses in FSL Trust); therefore I do consider this an “improvement” of sorts as both divestments resulted in gains, albeit much smaller in quantum as compared to last year. However, readers should note that both divestments this year have been classified as “investment mistakes”, and those who wish to know more details can visit the relevant posts under this category to read up.

As for scrip dividend, thus far only MTQ is offering this scheme among the six companies within my portfolio. For 2011, a total of 2,206 shares were received as a result of me choosing full scrip over cash dividend, and a further 1,000+ shares will be received by me on January 6, 2012 when MTQ’s interim dividend of 2 cents/share is credited to my CDP account in scrip. The scrip price determined for this round is 73 cents/share.

For the entire year of 2011, a total of $14,744 in dividends was received. Note that this does include special dividends from three companies – SIA Engineering (10 cents/share), Boustead (3 cents/share) and Kingsmen Creatives (0.5 cents/share); thus it should not be taken as an “indicative” year. If the special dividends were stripped out, total dividends would fall to $11,540. Based on a monthly average of $1,229, the blended yield is about 6.08%, slightly higher than the recently reported benchmark inflation rate of 5.7% for November 2011. If I assume all dividends revert back to base case (i.e. no change from 2011 for next year, just based on interim and final dividends), then yield may fall to somewhere around 5%+ of cost. Though this will be lower than inflation, it is still quite a respectable long-term yield as headline inflation is not expected to remain above 5% for an extended period of time (historically, it has hovered around 2-3% per annum).

The target for 2012 is to at least maintain the dividend yield, as it is expected that it would be a rougher and more uncertain year. Absolute dividends are expected to remain fairly constant (minus the special dividends), so cash flows should be relatively stable. Depending on whether additions can be made to the portfolio, it may help to bump up the dollar-value of dividends somewhat.

Benchmarking Against STI

The table above is a pretty new one in the sense that I had never before compared my monthly performance against the index before. Since 2011 I have been posting up my monthly XIRR performance against the index’s performance, and obtained a difference which represents whether I had outperformed the index (+) or underperformed it (-). A very interesting observation arose from the above table – for a value portfolio which I am maintaining, apparently the out-performance increases when the index is plunging, rather than rising. Notice that when the index had dipped below the 3,000 mark from August 2011 onwards due to the onset of the Europe Debt Crisis, that was when the portfolio had its best out-performance against the index. The second-widest margin of out-performance was in September 2011, when the portfolio registered a +11.6% gain over the STI, due to the share price resilience of companies such as Boustead, MTQ and Kingsmen Creatives. Amazingly, the largest gap thus far has been achieved at this point in time, with a +12% gain of my portfolio (-5%) over the index (-17%). I am not sure if this out-performance can be maintained in 2012.

One should also note that share price resilience is also a direct result of business resilience, meaning businesses which are adequately capitalized and enjoying steady business even amid hard times can qualify to be considered as “stable” and thus act as suitable investments through good times and bad. Companies which generate consistent free cash flows and which have a strong balance sheet will also see less share price volatility in general, except for the occasional desperate seller who will cause prices to move erratically due to the low liquidity. It is my intention to seek out more of such stable businesses which embody both growth and yield characteristics for my portfolio in future, and which are trading at undemanding valuations vis a vis their future prospects and cash flow generation capability.

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

1) Boustead Holdings Limited – There was no news from Boustead for December 2011. The interim dividend of 2 cent/share was received on December 16, 2011.

2) Suntec REIT – There was no news relating to Suntec REIT for December 2011.

3) MTQ Corporation Limited – There was a minor announcement from MTQ on December 15, 2011 about the liquidation of a subsidiary, MTQ Subsea Technology Pte Ltd, which has been dormant since 2008. Other than this, there was no news from MTQ for December 2011.

4) Kingsmen Creatives Holdings Limited – There was only a minor announcement on December 12, 2011 of a change in shareholder in Kingsmen Korea as a result of the issuance of 7,500 new shares to Mr. Daechul Lee as part of alignment of his interests with the Group’s.

5) SIA Engineering Company Limited – There was no news from SIA Engineering for December 2011.

6) VICOM Limited – There was no news from VICOM for December 2011.

Portfolio Review – December 2011

Realized gains have remained at $69,500 due to an absence of any dividends in December 2011.

For the month of December 2011, the portfolio has decreased by -5.0% (using XIRR in MS Excel to compute) against a -17.0% fall in the STI; thus my portfolio performance has outperformed the STI by +12 percentage points. This was a better performance compared to November 2011, when the portfolio out-performed the STI by +10.7%. Cost of investment has remained at S$242,600 and unrealized gains stood at +3.2% (Portfolio Market Value of S$250,500).

As mentioned previously, January 2012 shall be my last month of blogging, as the intention is to shut down the blog as my workload increases and I increasingly look to more time with my family and friends. I shall probably do a post reviewing and summarizing my investment journey these last 4.5 to 5 years in the middle of January, and my final post on this blog shall be my Jan 2012 portfolio review and summary. Be assured, however, that historical entries will still be preserved and accessible to all, and that this link will still remain active even if no new posts are made.

My final portfolio review (and post) will be on January 31, 2012 (Tuesday).

Monday, December 26, 2011

Boustead Singapore Limited – 1H FY 2012 Analysis Part 3

Part 3 will be interesting, as I delve into Boustead’s leasehold property portfolio and also its dividend history. I guess I had already mentioned quite a bit about Boustead’s prospects based on its divisions in prior reviews and analyses, therefore I shall not dwell too much on the same facts again in case I start putting readers to sleep! Basically, the underlying thrust of the Group’s strategy is still the same, though of course they are shifting their focus to earn more recurring income from their real-estate portfolio rather than endure the lumpiness from their Water and Oil and Gas divisions. This will be a slow and ongoing process and I am willing to wait as “Rome was not Built In A Day” to use the popular phrase.

Boustead Leasehold Property Portfolio

As can be seen in the table above, Boustead currently has nine leasehold properties in its portfolio, and this is set to rise further next year if it manages to clinch more of such deals. Note that as at 1H FY 2012, six are already completed and thus should be contributing rental income to Boustead’s top and bottom line from 3Q 2012 onwards. Another fact is that their clients are all heavyweights and multi-nationals, therefore the risk of default or late payment is also significantly reduced. Most, if not all, of them are in the technology, aerospace or logistics industries, and attests to Boustead Projects’ reputation as a design specialist which can customize facilities to meet international clients’ needs. Though this may seem like a niche market, remember that there are still many companies which are eager to enter and set up base in Singapore, as we are a very business-friendly country (with tax rates at 17%). Recent news also mentioned Rolls Royce (one of the largest engine producers in the world) setting up shop here at Seletar Aerospace Park, and looking to hire 500 staff to work in its new production facility. With the Government thrust to develop more areas of Singapore and add in hotels, entertainment and industrial sectors, this trend looks set to continue into the foreseeable future. Some examples which immediately come to mind are the Kallang Riverside Project and Jurong Lake District Rejuvenation Project, both of which have been envisioned and are in the pipeline for development in the next five years.

The remaining three properties will be completed in 2012, with the latest being June 2012 (1Q FY 2013). Therefore, the financial impact of the entire portfolio will only be felt in late FY 2013, and this does not include possible additions to the portfolio during the first six months of 2012. The total square metres of the properties has exceeded 90,000, and it is Boustead’s aim to grow it to 200,000 to 300,000 sqm before the entire portfolio can be considered for sale to an industrial REIT. I had attempted to compute a blended rental income per square metre using information from CommerciaGuru dot com, but apparently different areas of the industrial park can command different rental rates, and the variance can be rather pronounced as it is also tied to the age of the building. Therefore, I have not been able to pin down a rate which is “reasonable” and which I can use to forecast rental income for each property. Rather than use an estimate which may be way off the mark, I will just leave it as it is and wait for the Group to state the amount of recurring income it receives from its properties, or perhaps I can drop an email to the IR for more clarifications.


In the interest of brevity, I shall not discuss too much about dividends as I believe the above table already summarizes most of what I have to say regarding dividend history. Boustead supplements a lot of their recent dividends with special dividends, and FF Wong repeatedly makes it clear that these should be labelled “special” and thus one-off, and shareholders should not expect something of an SPH-type “special” dividend situation which seems to repeat every year (then why call it “special” in the first place??). One can notice that except for FY 2006 and FY 2007 (where there was a dividend in specie of Easycall shares and a booster final dividend respectively), dividends have trended up quite smoothly over the years.

Interestingly, dividend payments only started back in 2003 when the Group turned around under FF Wong’s leadership and overhaul. Previously, there was a lot of deadwood and the Group had many unrelated businesses which were dragging down the bottom line and consuming unnecessary resources (sounds somewhat similar to MTQ in this respect, though MTQ has since taken on a lot more leverage than Boustead). FF Wong streamlined all the businesses and divested the under-performing ones, and it was only in FY 2009 that Salcon turned around (there were too many legacy issues relating to it). Note that interim dividend payments commenced in FY 2005, and interim dividend has steadily climbed from just 0.5 cents/share in FY 2005 (split-adjusted) to 2 cents/share in FY 2012. Final dividend has been a little more erratic, with FY 2011 seeing a drop in final which was “replaced” by a very high special dividend of 3 cents/share.

However, from a total dividend per financial year perspective, it has been steadily rising except for a minor “blip” from FY 2008-2009 (drop of 1 cent/share). Therefore, I feel that shareholders can reasonably expect another 2 cents/share final dividend and also perhaps another special dividend to equal last year’s payout.

Another possible scenario (which I had mentioned that I will talk about during Part 1) is that Boustead may require more upfront capex investment into its three leasehold properties, as well as set aside additional cash for any planned upcoming projects, and so has less to pay out in the form of dividends for FY 2012. Therefore, dividend per share may fall to perhaps a total of 5.5 cents to 6 cents/share; but unless the cash is being earmarked for a major M&A, I feel that the payout should be quite similar to the previous year.


This analysis may be the last which I will post on my blog, for reasons which I will explain in a later post next month. Typing out and posting analyses on my blog is very stimulating for the mind, but unfortunately is also very time-consuming and tedious as I have to collate the necessary information in Excel sheets and also write out everything in a Word doc. Plus, I have to proofread every line for grammatical errors (I hate those) and punctuation errors. Considering the New Year is coming and I may be busier than ever, I may have to take a back seat on these detailed analyses. Anyway, I also realize that hardly anyone comments on them (unlike the more popular personal finance series), so I assume no one will miss them!

For Boustead, the Group may yet be on the cusp of something big, as long as FF Wong and his team can remain focused on the Group’s core competence and channel its resources into value-added activities. Though Boustead is sitting on a large cash hoard which is being eroded by inflation, it allows them to be ready to pounce on any opportunities which may be thrown up by the ongoing European crisis. Their well-managed Cash Management Program also means that at least some of the cash is earning higher rates of returns as provided by blue-chip corporate bonds, while an increasing amount of cash is also funnelled into their growing leasehold property portfolio. This will, in time, increase their ROE and allow for better returns. Considering the Group is already achieving admirable rates of return despite having a huge cash hoard and negligible leverage, I guess with proper Management and direction, this can only improve in future. I am happy to have been a shareholder of Boustead for the past five years, and if the business continues to remain resilient, I may remain a shareholder for very much longer.

Wednesday, December 21, 2011

Property Chilling Measures

Readers would know that I seldom blog about property (there are only five posts on this in the last four years!), as I am generally not very good in this area and am still experiencing my steep (and extended) learning curve. There are so many aspects to consider when it comes to investment property that it would take many years to really understand how things work, including the witnessing of the entire bull-bear cycle which is far more drawn out as compared to a full stock market cycle. My last post on property in June 2011 centred mainly on expectations and the so-called “Perfect Storm” (record supply of land, falling demand and rising interest rates). Note that about 6 months since then, all these have yet to come to pass, which is why I feel the Government has suddenly introduced another set of harsh (some even say draconian) measures to curb speculative demand once again; with this latest set of measures targeting mainly foreigner demand. Let’s look at the various aspects which I talked about previously to see if they may still constitute the “Perfect Storm”.

Before I go on, the reason for the title is because the phrase “cooling measures” has been rather over-used, and I was just discussing this with a friend the other day on whether the measures are designed to chill and freeze, rather than merely cool. Of course, it remains to be seen if such measures would eventually be effective, but a peek into history and also a review of what experts and analysts are saying may shed some light on what may transpire and also give some insights as to how property may behave. Crystal-ball gazing is not my strong point – therefore readers will have to understand that this commentary is typed out based on my (rather limited) understanding of the property market and perhaps may even make me sound like a “newbie”, but please bear with me as I feel that expressing my views on the subject can enhance my overall learning experience and hopefully hasten the learning curve effects.

A Fifth Round of Chilling Measures

I guess most analysts and even the newspapers would have discussed the latest measures (announced on December 7, 2011 and implemented from December 8) almost to death, but the above table provides a good summary of the effects and is taken courtesy from a DBS Vickers analyst report. To summarize, foreigners and non-individuals (i.e. companies) need to pay an additional buyer’s stamp duty (known affectionately as ABSD) of 10% for all residential property; while for PRs and Singaporeans, they need to pay an additional 3% ABSD for their second property and third property onwards, respectively. Two interesting “exceptions” are offered – citizens from five nations which include America, Switzerland, Liechtenstein (a country located in Western Europe, bordered by Switzerland and Austria), Norway and Iceland would be treated as Singaporeans and would thus be able to avoid paying the 10% ABSD, while for corporations who bought and sold fully-developed properties (including collective sale properties) within 5 years from December 8 would be exempted from paying the 10% ABSD too.

It is immediately clear that the measures are targeted at foreign buyer of residential property, as the proportion of foreigners buying high-end property here has been increasing as more “hot” money has been flowing from countries like USA and China to seek more safe havens. Property curbs in Hong Kong (which has seen property prices fall to a six-month low) and China are also driving more and more wealthy individuals to channel their wealth into properties in Singapore, thus pushing up prices of private properties (and hence HDB resale flats as well). There is, however, a growing debate on whether the latest measures would be effective in bringing prices down, and some have criticized the measures as being too harsh, as the global economy is still reeling from the effects of the Euro Zone debt crisis and economic growth in Singapore is expected to be anaemic. My personal view is that prices may not moderate much, as foreigners may have deep enough pockets to withstand the 10% ABSD, and interest rates still remain at record lows.

Previous Cooling Measures

Looking at the above table (courtesy of OCBC Research), one can trace the history of the last four sets of cooling measures implemented by the Government. The first round can be seen as being relatively mild, with the Govt removing the IAS and the IOL, effectively ensuring that buyers must pay down the principal cum interest and not just servicing the interest alone. Sep 2009 was the first indication of an increase in supply as the Govt reinstated the 1H 2010 confirmed list of GLS sites.

Round Two, implemented just six months later, saw the first sign of some clamping down of speculative fervour, with a SSD implemented for flippers who turned a unit within a year, as well as lowering the LTV ration to 80% (this meant buyers had to cough up more cash – 20%). Another six months later, when prices still went up relentlessly, the Govt introduced SSD for properties sold within three years instead of just one year, while lowering LTV to 70% from 80%. They also raised the household income level for purchase of DBSS, which I think was a wise (though long overdue) move, as it meant more people could afford “public” housing rather than go for overly expensive private condominiums. HDB supply was further ramped up to 22,000 units for 2011, compared with “just” 16,000 units for 2010. Another shrewd move was to disallow HDB owners to concurrently own private property, in order to reduce speculation and “flipping”. When it seemed that all these measures were futile, a fourth round was introduced in Jan 2011, where the LTV was further reduced to just 60% for individuals with more than 1 housing loan, and 50% for corporations. Harsher SSD rates were also introduced and tiered as shown in the above table, but apparently these still did not work well enough as many of the buyers/speculators were cash-rich and remained unruffled by these four rounds of measures.

And so the Government implemented the fifth round, which consists of the ABSD.

Latest Measures on Increasing land Supply

The Government has also released, on December 7, 2011, the 1H 2012 GLS list of sites. On the list are new land sites for 7,020 housing units in the confirmed list and another 7,120 homes, 4,857 hotel rooms and 218 sq km of commercial space on the Reserve List. Although this supply is lower than the 2H 2011 planned new inventory, it is still a relatively high figure and analysts are saying that the market will soon be flooded with ample supply. It is actually arguable whether the Government is finally releasing sufficient land to absorb the huge influx of foreigners in recent years, as well as to cater to the numerous couples aspiring to get married and “own” their first flat. Assuming market prices do fall and people hold back from transacting, this means that there may be more vacant units left over from the recent glut of new private housing released by developers, which would snowball into an even larger looming supply in say two to three years time. Another possibility is that foreigners, spooked by the draconian measures and the economic uncertainty, may leave our shores and create a vacuum in terms of demand, which I feel is unlikely to occur.

Sentiment-Driven “Perfect Storm”

The Singapore Government (like its counterparts in China and Hong Kong) exerts significant control and influence over the property market, as can be seen in the last 2.5 years where five rounds of property curbs were introduced in rapid succession. Thus, investing in property companies which develop residential property makes for a difficult proposition as the industry is continually “rocked” by changes in regulation and laws, not unlike the notoriously tightly-regulated airline industry.

The question now is, of course, whether sentiment will play a bigger role in creating the perfect storm, rather than people actually having no cash to stump up (I tend to believe foreigners and locals are a wealthy bunch of people who will not let a simple ABSD stop them in their tracks). If people feel hesitant, or are certain that prices will drop, then it becomes a self-fulfilling prophecy and the vicious cycle of falling asset prices may ensue. When Khaw Boon Wan (Minister for National Development) first mentioned about a Perfect Storm when he took office after the May 2011 Elections, I was wondering if this would really come to pass. A quick check with some older colleagues who remember the dark days of 1996-1997 has led me to the conclusion that once prices fall, they will literally plunge. Crisis can hit us so quickly that volumes almost completely dry up, and knowing how illiquid the property market is (compared to equities), the bid-ask spread may also widen considerably and this is when you read about a lot of “fire-sale” in the newspapers. In short, many people will get severely burnt.

Conclusion – Prudence Wins the Day

I guess I run the risk (again) of sounding like a stuck record when I caution all readers to be prudent and conservative in their finances, and to ensure they have sufficient cash buffer should they choose to leverage to invest in property. Though interest rates may be hovering at record lows, no one knows how the current situation in Europe will pan out and assuming something severe occurs in the global arena which somehow shocks the system, it may lead to some sudden, unexpected and very drastic changes which may leave one with precious little time to react.

If one lives their life in a frugal manner and takes up only very basic (not excessive) debt which is necessary to service their live-in residence, then you would not have much to worry about. But for those who are juggling with three or more mortgages and using one property as collateral of multiple loans, perhaps you should take a step back and ask – even though this may seem safe right now, could it be just a fragile house of cards which may collapse at any moment?

Friday, December 16, 2011

Boustead Singapore Limited – 1H FY 2012 Analysis Part 2

Part 2 of this three-part analysis will focus mainly on divisional analysis, as Boustead has four very distinct divisions which make it one of the harder conglomerates to put a value to. The interesting thing about Boustead which has somehow eluded me all these years (but which has somehow perplexed many an analyst) is that it has four disparate divisions which makes it a very difficult company to classify. On one hand, it is not an oil and gas company even though it has a strong energy-related engineering division and has contracts in many countries around the world for waste heat recovery and boiler systems. Neither is it purely a real estate development company though it has a large (and growing) portfolio of industrial leasehold properties and is considered a niche player in the biotech, logistics and aerospace industries. The best way to describe the company to someone (and mind you, many people have asked me!) is to say that it is a Company with a Pan-Asian focus which is in multiple industries, then quickly move on to explain each arm of Boustead before the listener has adequate time to react (and retort).

But before I become disarmingly irritating with my oft-repeated rendition of the interesting facets of Boustead and its myriad arms, let me assure the reader that there is a reason for the above. I shall end off Part 2 with reference to what was mentioned in the first section of this post, and use this to illustrate a very interesting fact about the Company which somehow continues to endear me to it (yes, someone will inadvertently remind me about the well-documented psychological bias – the endowment effect).

Segment and Divisional Revenue Analysis

Engineering Services as a whole saw a significant decrease in revenue for 1H 2012, down 53.5% to just $128.5 million from $276.2 million. This can be largely attributed to the drop in revenues in the real estate solutions division which saw a 73% year on year fall in revenue to $50.9 million (but 1H 2011’s numbers included the disposal of an industrial property worth $67.8 million). With Boustead’s focus being more on DB&L projects in order to build up their portfolio of recurring rental income, there has thus been less D&B contracts awarded. This, coupled with the slowdown in 1H 2012 also meant that there was less revenue to recognize for the division. However, my view is that Boustead’s Real Estate Division would serve as a buffer for the Group should the Euro Zone collapse, and also help them to generate steady and predictable cash flows during uncertain times. Since most (if not all) of their clients are blue-chip companies, there is also a lower risk of non-payment or default unless a major crisis occurs within the specific niche industries that each client is in.

Revenues for Energy-related engineering and water and wastewater engineering were slightly better for 2Q 2012, but nevertheless when compared on a half-year basis, the increase was not too impressive. For the former, the Group mentioned that more of the revenue will be recognized in future periods as many of the projects are in their initial stages of execution – therefore as a shareholder I should be expecting not just a higher revenue contribution year-on-year, but also hopefully better PBT margins (more on this later). For the latter division, though there was higher revenue recognition in 2Q and 1H, it failed to clinch additional contracts during the first half of the financial year. Somehow my feel is that the intensive competition of this industry and the thin margins are reasons why Boustead has to be very selective in bidding, and also to ensure it maintains its focus on high-value engineering services instead of degenerating into the model used by many China BOT companies (in which a huge capital outlay has to be expensed before cash flows start to stream in). That said, Salcon’s future at this point still looks uncertain as year after year sees more or less flat-lined revenues and PBT (last year saw a LBT because of the Libyan write-off). Sustaining the division may be possible over the long-term, but growing it seems tough and my view is that Boustead should still try their best to realized value from this division by selling it off! My worry is that too many resources, manpower and effort are plugged into the Division in order to sustain it, such that other divisions or areas are neglected or not given sufficient attention.

Geo-Spatial Technology seems to be the star performer – revenues grew 14.3% for 1H 2012 compared to a year ago, and the division is also generating healthy PBT margins and cash flows. Demand for software and professional services remains strong and is poised to grow over time, as Boustead focuses its business development efforts in Australia and South East Asia (e.g. Indonesia).

Divisional Margins Analysis

It’s pretty telling by looking at the table above just how each division has performed not just with respect to its PBT year-on-year, but also its PBT margins. Energy-Related Engineering disappointed by shaving off about 4.4 percentage points off its PBT margins to end at 7.3%, and registered a PBT of $4.6 million against $8.8 million a year ago (a steep 47.7% drop). The sad fact is that revenues had only fallen 17%, and the significant margin deterioration was not adequately explained by the Company as they chose to focus their commentary more on Geo-Spatial (the “star” performer). My view is that Management should also strive to be as candid as possible regarding ALL divisions and weak areas of the business, so that improvements can be devised to improve results.

Water and wastewater engineering (Salcon) has demonstrated another weak half-year, with a LBT of $0.1 million against a profit of $0.7 million a year ago. Not much was mentioned on why the division had incurred this loss even though there were no further write-offs from Libya, and the commentary simply mentioned that there was “steady progress” at its two major projects at Al Wathba in the UAE and Tuas Power Tembusu Multi-Utilities Complex in Singapore. PBT margin was already thin at 5.3% to begin with, and it would seem that pushing on, it would be a challenge to raise PBT margins higher, and SembCorp Industries and other larger companies make much stronger competitors and also have the financial muscle to outbid Boustead for water projects. Therefore, it may not make sense for Boustead to “knock its head against the wall” figuratively speaking to try to grow Salcon into a major player, and FF Wong has been trying to do so since FY 2002. I will continue to monitor this division but my heart feels heavy just talking about it, and I certainly hope Management has some ideas or strategies to turn things around.

For Real Estate Solutions, PBT plunged a very “impressive” 67.3%, but that was before adjusting for the sale of industrial leasehold property in 1H 2011. The sale last year actually depressed PBT margins such that they ended up at 18.7%; and for 1H 2012 the PBT margin had normalized and risen to a more decent 22.6%, with PBT at $11.5 million. There was slower recognition of revenue (and hence PBT) for the period in question, and shareholders should also recall Boustead’s increased focus on more DB&L projects which will provide future recurring income; thus in the short-term, revenues and cash flows would suffer a setback. Since it’s all in the name of “long-term shareholder value” (yes, I know it sounds horribly clich├ęd), I am willing to tolerate the short-term “lumpiness” in view of enjoying stable, steady and consistent future cash flows and profits.

Interestingly enough, the star performer (I think I must have used the word “star” at least three times, forgive me for that as I try to substitute for a better word) was Geo-Spatial Division, with revenues rising 14.3% and PBT rising 21.6% (implying costs and expenses had actually risen less than the rise in revenues). PBT margin is an impressive 25.6%, even higher than that of Real Estate Solutions Division, and it was also an improvement over the 24% registered a year ago. I did mention in my last analysis and review that this division was Boustead’s “cash cow” and it would show steady and moderate growth; plus cash flows were consistent as most, if not all, of their clients are large multi-national corporations or government agencies. With the recent contract with Earthmine announced in March 2011 making use of ESRI Singapore’s technology, and also with booming demand from resources and terrain planning coming from countries such as Indonesia, there is further potential for this division to grow further.

So as I close off this section of the analysis, I will refer back to my assertion that Boustead’s four divisions do have potential not just to weather the economic storm through “diversification”, but also creates very unique opportunities for the Group to take advantage of in the current turbulent climate. The two divisions which show potential and are performing above expectations (at least, in terms of contracts secured and near-term prospects) seem to be real estate and geo-spatial. Barring a complete collapse in confidence in the real estate industry in Singapore, Boustead’s real estate arm looks set to continue its momentum of contract wins, though the more recent announced wins have been mainly D&B, rather than DB&L. FF Wong is obviously trying to grow the leasehold portfolio (currently at 90,000 square metres, more on this in Part 3) in order to generate more predictable cash flows; and also to perhaps realize value should the portfolio be bought over eventually by a REIT.

The fact that Boustead has such varied arms makes it resilient to a downturn, as some sectors and industries tend to be more affected than others in an economic recession (example, banks or construction). Unless it is a protracted recession which covers ALL aspects of the economy (something akin to a second Great Depression), otherwise I believe Boustead should see resilience in its business model, and the huge cash stash should also act as a good buffer.

Part 3 will focus on something more interesting – Boustead’s industrial real estate portfolio, as well as its dividend history which I had not covered before in previous analyses. Watch out for that.

Sunday, December 11, 2011

Personal Finance Part 26 – Wealth Cannot Last More Than 3 Generations

The above title represents a very intriguing concept which has been known to the Chinese for millennium, and there is even a Chinese Idiom which states so “Fu Bu Guo San Dai”. Interestingly, while reading “Millionaire Teacher” written by Andrew Hallam (a new book written on investing and personal finance, written by middle-class millionaire teacher Andrew Hallam), I also discovered that he had written about the exact same phrase, though he did not elaborate too much about it. Basically, this teaches us that wealth earned by the first generation can seldom, if ever, last past three generations. The reason for this is so obvious in its simplicity that it is surprising that most adults fail to grasp it – money which is not “earned” tends to be squandered. How does this fit into personal finance? A lot can be learnt about how people behave under various circumstances, and I will illustrate my point using this phrase as a backup; to also show evidence of how parents should teach their own children about money. Granted, it is not easy to “break the cycle” and prove an age-old adage wrong, but there’s no harm in trying to inculcate the right values in the younger generation from an early age.

The First Generation – Wealth Building

The first generation would represent, in most cases, the generation which possessed the highest degree of entrepreneurial spirit, and who believed in hard work, sweat and effort. Most of these people came from a faraway land (e.g. China, India) and arrived in Singapore with hardly a penny to their name, and worked as coolies or labourers doing menial tasks. The hard life made many of them strive to break free of their “bondage” and many of them undertook risks to start businesses in order to achieve freedom from their manual labour. Of course, many of them failed and disappeared into oblivion, but those who survived thrived and grew their businesses and eventually became very rich as a result. However, their frugal habits which were cultivated from their days as hard labourers stayed with them, and because they understood the value of their hard work, sweat and tears, there was also an appreciation of the wealth they had painstakingly accumulated.

Another class of successful first-generation wealth-builders are those who subsisted on a fixed salary (i.e. salaried employees), but who were prudent in spending, saved and invested throughout their lives to accumulate a substantial nest egg. Although these people did not run businesses or make breakthrough products like the iPhone, they nevertheless also understood the value of a dollar earned because they put in considerable effort in their day job, and now have the financial means to enjoy their olden years without having to slog like a dog. The same theme can be picked up here as well – hard work, effort and appreciation of a dollar earned will go towards building long-lasting wealth. These are the people who worked hard to get where they are, who appreciate every last dollar they own; and will never let anything or anyone ruin their plans for a comfortable retirement.

Just for the record, these people usually consist of those who came from the 1900’s to the 1940’s, who had seen Singapore’s rise as an entrepot trade centre to an economic powerhouse, and who had grown along with the country as well. They were our forefathers (grandparents and great-grandparents) who slogged hard and lived in an environment where there was little financial security, unlike what the young are enjoying today.

The Second Generation – Wealth Maintenance

Along came the second generation, which consists mainly of people born in the 50’s and 60’s (the baby boomers). These were the direct descendants of the entrepreneurs and businessmen, and grew up during the years after the World Wars, and who also experienced Singapore’s transformation into an economic miracle. These are the folk who grew up witnessing how their parents slogged to become who are they are now (successful people), and they may also have chipped into help their parents out in the business. However, not being the founders themselves, they would not have the same kind of emotional attachment to grow the business as their parents did. This is not to say that they do not have the competence to manage and grow the business, but they may never attain the same level of passion for the business as their parents did. In fact, there have also been known cases of children who refused to carry on their parents’ trade, and who chose a different career path; thus the business empire had to be taken on by “outsiders”, who would not have the same kind of loyalty to the business as blood kin. Other more stark examples may include a skilled Char Kway Teow hawker whose son is much more educated and does not wish to carry on this “menial” job, but instead prefers to pick up a pen to do accounting or law (I have heard of such cases by speaking personally to older hawkers in Singapore – this is why there is less and less great Hawker Food!).

So assuming in cases where the parents had built up a huge business empire and created massive amounts of wealth, the baby boomers simply had to maintain it and ensure it did not flow down the toilet bowl. This was somewhat easy as they had a direct hand in managing the business (in some cases), while in other cases where they did not, they had witnessed first-hand what their fathers and mothers had been through, and thus understood the importance of ensuring the wealth was retained, and not squandered. This is the so-called second generation effect – they help to maintain the wealth which was built up by the first generation. So far so good. Now let’s come to the third generation – Generation X and Y.

The Third Generation – Wealth Depletion

The third generation, affectionately known as Generation X and Y (born in 1970s to 1980s; and 1990’s to 2000’s) are the most blessed generation. They were born when Singapore was stable (after having broken away from Malaysia) and was on solid economic footing, with a strong Government (PAP) and sturdy policies. There was political stability, economic security and financial stability as well. Most of us (yes, myself included) grew up in an environment where we did not have to struggle and go hungry, where education was widely available, and where material pleasures were readily available (with a new invention called the Credit Card, no doubt). Therefore, this generation has also been given the label “Strawberry Generation” – looks good on the outside, but cannot last when encountering adversity. Because of the inherent stability in our lives and the lack of a push factor to strive hard and achieve, the spirit of entrepreneurship has all but died out and many of us are relegated to salaried jobs earning a fixed income which keeps us happy and contented.

It is this generation which is responsible for poor financial habits and for squandering away the wealth built up and maintained by the preceding two generations. Most of Generation X and Y were relatively insulated from the day to day operations of the business, and add to that the fact that parents (the baby boomers) were also over-indulgent in wanting to ensure their children lived a comfortable life; so much so that they provided too much of a comfortable life for this generation. Without the need to strive hard, this generation thus lacked the necessary appreciation of money and how hard it is to earn it, and proceeded to spend lavishly and wantonly. An easy supply of money coming from two previous generations also fuels this habit and exacerbates the careless (and callous) attitude in which this generation frivolously fritters away the wealth built up over 50-60 years.

While it might be a bit of an exaggeration in terms of my description of how the current generation behaves (for of course, there are also shining examples of youths who grasped the concept of delayed gratification and appreciate the value of hard-earned dollars), there have been ample examples in the newspapers over the years (yes, I can find examples stretching from 2003 till now) which serve to demonstrate, anecdotally, how the current generation has a higher tendency than the previous two to spend excessively and without due consideration.

I have read reports of fathers who spend lavishly on their children, buying them anything from branded goods to cars to the latest gadgets. With such constant pampering, it is no fault of the child that they grow up to be completely spoilt adults who are used to getting their own way, whether or not they have the financial means for it. A life hooked on materialism and on borrowed money (credit cards and loans), while living paycheck to paycheck, seems to be what errant parents have set up for their kids.

Lessons Learnt

I guess one can already tell what the moral of this post is – how to inculcate the proper financial habits and value system within a generation who is unused to struggle and hard work. For all of us aspiring parents or those who are already parents of young toddlers, make sure they understand the value of money. There are actually many websites which give advice on how to educate children about money, and to ensure they treasure it and appreciate it from a young age. Now that we are already moving into the fourth generation (Generation Z they are called), it is extremely important to educate them well financially so that the wealth depletion and drainage stops before it gets worse.

Of course, those parents who are already financial wrecks themselves are hardly in a good position to impart prudent values to their children, but perhaps this post also serves as a wake-up call for those who may be exhibiting poor financial discipline. If your lifestyle is ostentatious and you have poor money habits, it is perhaps a good time to sit down and review your finances and to ask yourself if you need some proper financial education. Call it self-discovery and soul-searching, if you will.

For parents who may have teenage children, do yourself a favour and stop the pampering. The key is to be like Warren Buffett – he believes in giving his children just enough so that they can do anything they want, yet not an excessive amount such that they do not need to do anything at all (i.e. sit on your butt all day, watch television and spend money). And we are talking about one of the richest men on the planet! If parents consistently help their kids to pay off their student loans, purchase cars for them, buy branded items and gadgets for them whenever they request, then there is simply no incentive for the young adult to work hard for these items and to manage their financial life. So the only way to “teach” is to let them pay for everything on their own – this not only builds discipline and perseverance, but also teaches the value of delayed gratification, striving hard and saving for what you desire and plays down the materialistic instinct residing in us. Over the long-term, this will definitely do more good than harm.

Tuesday, December 06, 2011

Boustead Singapore Limited – 1H FY 2012 Analysis Part 1

Boustead released their 1H FY 2012 results on November 14, 2011, and frankly it was not as disastrous as I had anticipated, considering there was an economic tsunami at our doorstep which would affect most companies. Though the numbers did not look spectacular, the Group put up a credible performance in general, with my only grouse (for the last few years, actually) being Water and Wastewater Division.

This analysis will be split into the usual three parts. Part 1 will touch on the financial statements, including income statement (briefly), Balance Sheet (more important) and Cash Flow Statement (the lifeblood of any company). Part 2 will focus on divisional analysis, and will break down the contributions by each division to Group revenue and PBT, and compute PBT margins as well. Part 3 will discuss Boustead’s industrial leasehold asset portfolio, dividends and also the plans and prospects moving forward, and how Boustead can navigate the stormy economic climate.

Financial Analysis – Profit and Loss Statement

On the Income Statement, there is nothing much to elaborate on as it was previously indicated that yearly results are more indicative, rather than quarterly. For 2Q 2012, revenues fell 30% year on year to $91 million due to slower recognition of revenue for real-estate projects due to Boustead’s focus on Design, Build and Lease (DB&L) projects, and the Energy-Related Engineering Division also saw slower recognition of revenue as contracts were in initial stages. These were the two main reasons for the drop in revenue, but it was more than offset by the 44% drop in COGS to $55.7 million, thus lifting gross profits by 14.4% to $35.3 million. For 1H 2012, the effect on gross profit was also stark (as can be seen from the table above); with revenues falling 43.7% but gross profit only falling 29.4%. Note that for 1H 2011, the results included a one-off sale of leasehold property which distorted the results. After adjusting for this, revenue would have fallen only 29% year on year for 1H 2012, instead of 43.7%.

An interesting point to note is that gross margins have, apparently, improved significantly. Gross margin for 2Q 2012 increased to 38.8% from 23.6% a year ago, and much of this improvement can be attributed to the Geo-Spatial Division (which we shall see later in Part 2, has a very high PBT margin as well). Also, several projects under the Real Estate Solutions Division garnered higher gross margins, thereby pulling up overall Group’s gross margin. For 1H 2012, gross margins were at a very healthy 37.4%, and hopefully Boustead can sustain this momentum for 2H 2012 as well in order to achieve better overall profitability.

Considering that net profit attributable to shareholders (for 2Q 2012) increased 12.7% while gross profit improved 14.4%, this shows good expense control. A glance at the Profit and Loss shows that selling and distribution and admin expenses both increased 15% respectively, in line with the increase in gross profits, with only a spike seen in finance costs as more debt was undertaken to finance Boustead’s leasehold portfolio under construction (more on this in Part 3). The same distortion can be seen for 1H 2012 due to the one-off sale of leasehold property, and after adjusting for this, profit attributable would have decreased a much smaller 5% instead of 56%.

Financial Analysis - Balance Sheet Review

Boustead’s Balance Sheet displays some changes since 6 months ago (March 31, 2011), and the focus now would be to comment on these changes and how they will impact the Group moving forward. For current assets, cash has fallen by about $17 million (more on this later), while trade receivables has seen a large drop of $30 million, offset by an increase in other receivables and prepayments of $9 million. The most significant increase, however, is that of investment properties under non-current assets – it had increased from $13.5 million to $41.4 million in just six months. Obviously, a lot of progress had been made on the construction of Boustead’s industrial leasehold properties and this was reflected in the increased capitalization as witnessed on the Balance Sheet. AFS investments also increased as part of Boustead’s Cash Management program, which involves the purchase of short-term blue-chip bonds with yields higher than bank fixed deposits.

Bank loans did not fluctuate much at all and remained relatively constant at $24 million, down slightly from $25 million six months ago. Current ratio was a healthy 1.69 as at Sep 30, 2011, against 1.95 in the previous period. ROE stood at 15.9% (annualized using 1H 2012 net profit attributable to shareholders), which is a little on the low side as a result of Boustead’s large cash hoard generating paltry returns.

Financial Analysis – Cash Flow Statement Review

Boustead’s cash flows have always been healthy, but for 1H 2011 OCF was lower than usual, at just $11.4 million. One year later, for 1H 2012, OCF hit $54.7 million, up nearly 3.8x, largely due to better collections from debtors and also an increase in Trade Payables. 1Q 2012 already saw an inflow of $34.4 million OCF, and 2Q 2012 has added another $20.2 million, and this shows that the core business is generating a lot of healthy cash flows, which are then used to invest in investment properties (and of course, with some left over for the payment of dividends). I will tie this in later with Boustead’s dividend history, and come up with a conclusion on whether I think dividends will be sustainable.

For investing activities, it should be noted that very little was spent on capex (in fact, just a mere $870,000 for 1H 2012). Most of the cash went into purchase of AFS and HFT investments, and I understand that this is part of Boustead’s strategy to reap higher returns on its cash hoard as it waits to deploy it into suitable acquisitions. A last check with the Company has revealed that this cash is most likely invested in high-grade bonds with short tenures, thus the yields are better than bank deposit rates though it may not exceed inflation rate of 5.5%. I guess what is more important is the protection of capital as even high-grade bonds may see instability in their pricing amidst the current turbulence.

Boustead’s stable of industrial leasehold properties is taking shape, as it spends $12.6 million in 1Q 2012 and another $15.6 million in 2Q 2012 for a total of $28.2 million for 1H 2012, and this shows up in the Balance Sheet as an increase in investment properties (by about $28 million as well). Part 3 will display Boustead’s portfolio of industrial leasehold properties, and I will also offer my comments on how I think Boustead will grow this portfolio and realize more value for shareholders in the long-run. From the table above, if we compute FCF the traditional way, then 1H 2012 would have seen a massive FCF inflow of $53.8 million. If we exclude the additions to leasehold property, then it would still have been a very healthy $27.7 million. Boustead has declared an interim dividend of 2 cents/share which amounts to about $10 million, and it can be seen from a glance that the $27.7 million FCF (net of leasehold property additions) is more than sufficient to support this payout. I will elaborate in Part 3 why I think Boustead did not pay out a higher interim dividend, using its dividend history as support.

Under Financing cash flows, most of the outflow was due to the payment of final cum special dividend (final dividend of 2 cents/share and special dividend of 3 cents/share for FY 2011), and about $1.5 million was spent in repaying some long-term bank loans. Cash balance remains healthy at $192.7 million, and with about $24.2 million in bank loans on its Balance Sheet, Boustead is currently carrying a net cash balance of some $168.5 million.

Part 2 of the analysis will delve into Boustead’s divisional performance, and I will have quite a few comments here based on my understanding of the Company, and whether I feel the Group can get through this difficult period relatively unscathed. This will be based on an analysis of each division’s contribution to Group Revenue and PBT, as well as the PBT margins by division.