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.

31) Boustead logo 29052016

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:

32) BP share price 29052016.jpg

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:

33) Boustead Singapore Income Statement 29052016.jpg

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.

34) Boustead net profit 29052016.jpg

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:

35) Boustead Singapore share price 29052016.jpg

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?

36) Boustead BS 29052016.jpg

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.

37) Boustead CF 29052016.jpg

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.

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