Boustead Singapore Part II

This is a continuation from the post “Boustead Singapore Part I”

Let’s start off with a table:

The data above basically confirms our thesis in part I: Boustead is currently facing strong headwinds. Dividend has been reduced to multi year lows (if you exclude the dividend in specie distribution of BP), ROE has dropped substantially. NAV too has dropped, largely due to the demerger of BP.

At the share price of $0.79, this means we’re paying a PER of 15 times, and a P/B of 1.4 times. Dividend yield would be 3.8%, but I postulate that this is artificially low. The distribution of 3 cents is because there has been an additional dividend in specie in FY16. I’d expect a dividend of at least 4 cents for FY17. (2 cent interim and 2 cent final). At least.

Boustead has a long term track record of growing the book value. CAGR of the book value, even accounting for the demerger, is around 10%.  Over the years, the P/B has ranged from close to 1.0, to almost 3.0 when valuations were better.

The current P/B of 1.4 is close to it’s all time low in the past decade.

Also, I’ll note that Boustead has a net cash position (after accounting for borrowings) of $165.6mil. That works out to 31.7 cents per share. That works out to be 40% of the current share price. On top  of this, the company has $76.1 million of financial assets for sale / held for trading, half of which are “highly liquid” aka cash equivalent.

To paint an accurate picture of the backdrop against which the company is currently operating, I thought FF Wong’s most recent comments after the FY16Q4 results are the most telling. They are, as always, brutally frank. In response to a question about how competitive the environment is, this is what he said:

“……the severity is beyond imagination. I personally have only seen this situation twice. This time being once, the other time being 1983 – 1997, in which there was huge consolidation in the industry because of the low oil prices.”

Deep value? Contrarian? Thus far it looks like all the boxes are ticked.

Let’s take a closer look at each of the 3 divisions.

Real Estate Division (Boustead Projects)

The results ain’t too bad, in fact, it’s better than what I was expecting. As one can see, the bulk of the drop in NAV is due to a 1 off payment of a $80mil dividend to Boustead. BP tends to have a recurring, stable revenue, regardless of how the industrial property market is doing. This is because the bulk of their profit comes from Design-Build-Lease (DBL) projects. In this type of project, BP actually procures the land and builds the project in consultation with the tenant. The project is built according to the tenant’s specifications and in return, the tenant is locked into a long lease with heavy penalties for early termination. This model involves a heavy initial investment, but in turn BP has a resilient revenue stream that’s predictable and recurring.

On top of this, BP has always focused on design capability. They have tried to win contracts which require certain expertise to build according to the tenant’s requirements, instead of the typical industrial builders.

Going forward, I’ll expect BP results to flatline or dip slightly. BP is actually trading close to it’s NAV right now. Their properties are very conservatively valued, and I find it hard for BP to go at a price substantially below it’s NAV. If one eliminates the $80mil 1-off payment, BP’s NAV should stabilise in the coming quarters.

On top of this, a substantial part of the loans taken up by BP has been paid off in FY16:

“Total borrowings (both current and non-current) halved to $93.4 million following the Real Estate Solutions Division’s repayment of bank borrowings to fully deleverage six properties and to reduce bank borrowings on remaining properties.”

Here, I’ll deviate a bit and try to analyse the demerger of Boustead Projects from Boustead in 2015. As Boustead still owns 51.2% of BP, BP is effectively still a subsidiary of Boustead and all financials are integrated accordingly. Only change would be that the non-controlling interests has risen with the distribution of dividend in specie.

In 2015, Boustead shareholders were given 3 shares of BP for every 10 shares of Boustead that they held. BP shares were trading at around $1.05 when they were listed. That effectively means for every Boustead share one held, approximately $0.315 worth of BP shares were given.

Boustead was trading at approximately $1.42 or so when BP was listed. Now, it’s trading at $0.79.

Even if one were to sell the BP shares immediately upon receiving them, and receive the $0.315, overall, it’d still have been more profitable to have sold the Boustead shares instead of collecting the dividend in specie.

Of course, this is a simplistic way of looking at it. The troubles in real estate and O&G has only intensified since then, but the demerger, at least up to now, has not proven to be value accretive to Boustead shareholders.

Energy Related Engineering Division

The figures say it all. This division has suffered the most in % terms. Revenue has dropped by 33% but PBT tanked 73%, indicating that margins have been eroded badly in FY16.

Boustead has managed to secure $95mil worth of orders in FY16, although this, together with last year’s $105mil, are considered the low end of the spectrum when comparing previous years’ orders secured.

Boustead’s strategy with regard to this division has always revolved around targeting the higher margin, higher expertise type of engineering, while outsourcing the easier but low margin work such as manufacturing. In this way, they can maintain their margins while growing “quality” earnings.

As with my earlier analysis on Hock Lian Seng, I generally favor companies who focus on their margins. In my experience, it’s easy to grow “low quality” earnings. Most companies can increase earnings to a limited extent by cutting prices and increasing volume.

The companies who can focus on high value, high margins work which require certain expertise or competitive advantages, are the companies that competitors will find difficult to dislodge.

There isn’t much else to analyse here, everything’s pretty much expected: O&G sector is getting killed right now.

Cuts in capex by all major O&G producers = less spending on supporting industries

I don’t think this is going to correct itself anytime soon, at least not within 2016, and even when energy prices pick up, it typically takes some time before the O&G players start to ramp up capex and this flows down to Boustead. In short, this division is likely to suffer for some time to come.

Geo-Spatial Technology Division

This division involves the distribution and support services of the ESRI technology system, which is a geographic planning system utilised by institutions and governments for planning infrastructure and other city planning.

It is used mainly by the governments and MNCs in SEA, particularly so in Australia, which accounts for their largest contract win to date for this division.

Now ESRI has a strong competitive moat, simply because of the “stickiness” of planning softwares. Imagine having had all the planing done on this software for the last x number of years. To switch now would be a huge upheaval. Staff would have to undergo training, there would have to be data porting and back up, and in many instances, the data involved is sensitive and confidential data.

Why would an existing client switch? Unless there are really really strong reasons to do so, existing clients would likely stick to ESRI, even if ESRI demands a slight premium to it’s competitors. This is certainly a durable competitive advantage.

In response to a question regarding the likelihood that Boustead would lose the ESRI license in Asia, FF Wong said that it’s highly unlikely as Boustead has been representing ESRI for 40 years and has a very solid relationship with them. Also, Boustead holds the franchise for several countries including Singapore, Bangladesh, Australia etc and has been amongst the top performers globally within the ESRI family. Hence, he believes it is unlikely they will lose the franchise.

Hence, the geo-spatial earnings continue to be rather resilient. The y-o-y drop is accounted for mainly by forex risks, as USD has continued to strengthen against both SGD and AUD.

AUD is the currency that Boustead receives the bulk of the revenuve , SGD is the currency that Boustead reports in and USD is the currency that Boustead buys inventory in.

Additional Considerations

FF Wong, the main driving force behind Boustead, is a very shrewd and capable man. I wont be elucidating on this here, but anyone who bothers can read about what he has done prior to Boustead. This guy is someone whom I’ll trust with my money if he says he’s doing a startup selling ice to Eskimos. He just makes things work.

However, that’s a risk too. At 70+ yrs old, he no longer has time on his side. IMO, a Boustead without FF Wong is likely to be considerably weaker. There’s no replacing a Messi in your team.

Aside from the key man risk, another point to note is that aside from the large cash hoard that I have described in Part I, Boustead also has a MTN credit facility of up to $500mil.

In other words, Boustead really has kept it’s powder dry and is likely able to capitalize on distressed sales if the downturn intensifies. This is the true mark of a powerful capital allocator.

My personal experience with Boustead

I initiated a small position of approximately 50,000 shares in Boustead back in 2012 at around $0.85 or so. At that time, it was the most richly valued stock I own and the only stock that was > 1.0 times of book value, which is why my position is not large.

Having a strict “Graham” philosophy, I resolutely refused to pay any higher, despite my initial analysis of Boustead being very stellar and a fantastic company.

Since then, the share price has gone ballistic to as high as $1.93! I watched and rued the day when I was pondering going big into Boustead, but kept refusing to pay a higher valuation. As the share price kept soaring, I kept wishing it’d just come down.

4 years later, the share price has now tanked, mimicking the general downtrend in O&G and industrial properties.

My Conclusions

I have no doubt that Boustead is one of the best managed companies that one can find in SGX. The management has strong integrity, and the company is one of the most transparent and shareholder friendly companies in my experience.

As optimistic as I am about the strengths and the intrinsic value of the company, I do not think now is the right time to start going into Boustead in a big way.

The 2 main engines are unlikely to start revving anytime soon. Energy is likely to stay depressed for at least another year, and the industrial property segment has just started to dip in the last 2 quarters.

USD is also likely to remain strong or strengthen further compared to SGD or AUD. In short, Boustead will continue to swim against a strong current.

All this is on top of what I view as a highly risky global state. The low credit environment for the past 7 years has made everyone complacent. I am generally very cautious at this stage, preferring to demand a very wide margin of safety. This caution may cause me to miss the boat on some big investment gains, but I think it’s the wiser thing to do in this current global environment.

I’ll be keeping 1, probably both eyes on Boustead though. I’ve missed the boat to get into Boustead in a huge way once, really don’t wish to miss it again. This becomes even harder to analyse as I’ll have to monitor BP as well, and at any 1 point of time, decide which has more value, before allocating capital.

While I’ve no intention to buy Boustead in the coming months, I’ve absolutely no intention to sell either. If the share price continues to drop, and valuations get even more attractive, I’ll be ready to pounce.

My most intelligent educated guess, is that Boustead’s share price will bounce along the current 5 yr lows (around $0.70) without going too much higher or lower, for quite some time to come. I use the word “guess” as it is a fool’s game to try to make such a specific prediction.

In the meantime, I’ll be paying attention to how Boustead utilizes it’s cash, and the types of acquisitions or deals it makes with them. Stay tuned.

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Boustead Singapore Part I

I have had time to update my thoughts after reading Boustead’s FY16Q4 results. Boustead has always been a tough company to fully comprehend, mainly because it’s 3 main divisions (used to be 4, with the water treatment division) are in seemingly different industries with little synergy between them. I do not regularly update or keep track of the average price of my Boustead shares, inclusive of dividends as Boustead is a long term holding, and I have been receiving scrip dividends, which in turn has generated further scrip dividends for me. It’s quite a hassle to update that.

I have held Boustead shares since 2013, and as of the time of writing, still own about 50K or so lots.

I shall skip the history and the detailed analysis of Boustead’s PAST business operations, because this is a company with a long and chequered history. I have analysed the past 10 years of the company, both quantitatively and qualitatively. To talk about it here would require easily 5 posts on this company alone, something that I’m not willing to do.

So instead, I’ll summarize it’s current situation. Boustead has 3 divisions:

1. Real Estate Solutions (in the form of Boustead Projects which is listed separately. BP was listed by way of distribution of dividend in specie.)
2. Energy related Engineering (It used to have a water treatment division but that has been integrated into this division)
3. Geo-Spatial Technology

I sold the BP shares that have been distributed to me at around $0.90, pretty much the week or the following week after receiving them. Since then, BP has done this:

It wasn’t divine foresight on my part. Rather, I remember distinctly thinking then  that my overall portfolio (together with 1mil shares of Hock Lian Seng, some LTC Corporation and some King Wan then) was too heavily packed with construction companies and just wanted to reduce my exposure to more property companies.

Plus I was probably feeling lazy to re-analyse the prospects of BP as a separately listed entity. In this instance at least, laziness does pay off.

Now let’s start with the overall financials of the company:

Well, I’m not sure how visible this would turn out, but I utilised multi year data to analyse Boustead as it’s 2 main divisions revolve around industrial property and the O&G sectors. We all know these sectors are cyclical in nature, so multi year data is needed so as to avoid “masking” over or under valuation in peak and trough years.

Everyone would agree the GPM is indeed very impressive. 30+% seems to be the norm, bearing in mind that this right here is 13 years worth of data. Earnings in the latest FY has been poor by the lofty standards of this company.

Just 2-3 years ago, the company was enjoying a PE multiple of close to 20+, and a price to book value of close to 3.0.  Now, PER has dropped to just under 15, P/BV is around 1.3-1.4.

This is partly because Boustead has just hived off it’s BP division for a listing. Boustead still owns 51.2% of BP though. But that’s not the main reason. The main reason is because the 2 main engines for Boustead are both currently suffering from a protracted downturn.

Everyone agrees that O&G will come back. Everyone disagrees on when.

Everyone agrees that property in Singapore will remain depressed and continue to moderate. Everyone also disagrees on how severe it would be in the coming quarters.

This chart on Boustead’s net profit shows it all. Even without the demerger, the drop in net profit means FY16 is the worst year in 7 years.

Bear in mind that the following quantitative and qualitative data reflects a company in industries that are in multi year lows, in the doldrums and negativity is certainly high.

Correspondingly, the share price has done this:

Peak to Trough, Boustead has fallen by more than half.

True to this blog’s name and stated tagline, this type of company in this type of situation, is exactly where I’d start hunting for deep value opportunities. Emphasis on the “deep”.

So now let’s recap what we do know:

Boustead’s earnings has hit multi year lows (based on the past 13years of data). The share price has also reacted accordingly.

Despite all this negativity, Boustead is STILL profitable.

The 2 main divisions of Boustead, which account for 79% of the total revenue of the company, are in currently distressed sectors. The 3rd division, Geo-Spatial Technology, is IMO, one of the strongest competitive edges of Boustead.

So now we can all agree that an investment in Boustead currently, or in the near forseeable future, seems to be as contrarian a bet as one can make. It’s a tough place to be in right now, so can Boustead survive and thrive?

This is Boustead’s balance sheet. For simplicity and readability, I have eliminated a lot of data to focus mainly on the cash on hand vs borrowings. I have not included the data on the receivables, but the data looks normal. i.e. Boustead’s clients are still paying up in a timely manner.

It is clear that Boustead is holding on to a large cash hoard. The cash holdings is at the highest it has ever been save for FY15. 

On top of that, it’s borrowings has declined substantially in FY16. Most of the borrowings is in the form of secured loans parked within BP, for the construction of industrial projects.

Boustead has also been trying, albeit without any success, to acquire distressed assets. The most recent attempt was in late 2015, when Boustead formed a consortium to acquire energy assets in Indonesia (mainly Natural gas fields) from Triangle Energy Global (TEG).

This is the kind of acquisition I like to see Boustead pursue: Boustead’s revenue is currently mostly project based. This means revenue can be lumpy. This deal would’ve provided more recurring income. More importantly, as Boustead frankly admitted, this sector is in the doldrums right now, and the valuations are very enticing.

“The current business environment in the global oil & gas industries is depressed due to low crude oil prices. This has in turn resulted in attractive valuations for energy assets. The Group believes that the Purchase Price offered for Pase PSC provides great value and that the downside risks of the Acquisition can be comfortably managed.”

Unfortunately, the deal fell through as another entity, PT Enso Asia, offered a supposedly better deal. It may not necessarily been better as TEG would’ve received more if the consortium manages the energy assets well enough, and they do have the track record to do so. Anyway, what we have to know is that the deal didn’t complete.

Still, this is encouraging as it tells me Boustead has it’s rifle loaded, and is currently in hunting mode.

Knowing FF Wong’s stellar track record and history, I am confident that any deal he makes would be an astute one. He has had many many instances where he walked away (Big Box deal is another example) when he could not negotiate ideal terms.

Now, let’s look at the cashflow statements. This is the most exciting, as it provides the “ammunition” for Boustead to acquire.

This is again, of course simplified.

What are the important points here:

• Boustead’s operations are incredibly free cashflow positive! Again, as I have said before, I just simply love FCF generative companies. Boustead is as FCF generative as it comes. Again, I’d like to state that I have long term data and there isn’t a year I can find that its FCF -ve.
• In FY16, Boustead has paid off a very substantial portion of borrowings ($93 million worth)
• Cash and cash equivalents are near to all time highs ($259 million)
• Boustead has done share buybacks in the past year ($1.30-$1.36 from May to June 2015, $0.85 in Oct 2015)

I think any value investor, who has done an in depth analysis of the financials, would agree that this generally, this is a company that has a long term stellar record. Forget the share price right now. Look at the data!

It is a fool’s game to try to predict the future, but here’s my intelligent fool’s guess:

Boustead is currently on the lookout for suitable distressed assets to acquire, and I believe they will do so before the current crisis ends. As they say, why waste a perfectly good crisis?

Now that we understand that the financials, in the 2nd part, I’ll be looking at the various ratios and how they compare over the years. I’ll also be dissecting the characteristics of each of the divisions, and how their individual performance looks like.