Boustead Singapore Part II

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

31) Boustead logo 29052016

Let’s start off with a table:

38) Boustead FR 29052016.jpg

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)

39) BP results 29052016

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

40) Boustead Energy division 30052016.jpg

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.

41 )Boustead 30052016.jpg

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.

11) LTC Corp Price_Index1Q16.jpg

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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16 comments

  1. Thanks for your in depth discussion on this company. I have also been waiting to go in this counter for a few years now after I noticed their consistent PMs!

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    1. Hi dcwc95,

      In AR15, page 21:
      “Any significant fall in
      AUD against both USD (the currency that we purchase in) and SGD (the currency that we report in) may impact our results further down the road.”

      It’s been mentioned in several other ARs and reports. This is only for the geo-spatial division, not the whole company

      Liked by 1 person

    1. Hi financiallyfreenow,

      For every 10 Boustead shares that you own, you received 3 BP shares as dividend in specie.
      Hence, for every 1 Boustead shares, you technically received the equivalent of 0.3 BP shares.
      At listing each BP share is $1.05 (approximately).
      I was just breaking it down such that each Boustead share received a value of (0.3 x $1.05) = $0.315 (at listing) in BP shares, so that we can compare in $ terms whether the demerger generated value for SHs thus far.

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  2. Hi TTI, I took a look into this idea and a two quick questions came up, it’ll be great if you have insight into any of these as clearly, you have done more research into this than I did and your SG-investing experience is far greater than mine.

    1) You wrote that “Their properties are very conservatively valued”. Do you mean the valuation gap between the “properties held for sale” written at ~30m on the balance sheet and the $103m valuation they receive according to foot note 18 to the 2016AR? What are your thoughts about that $100m valuation? Based on the implied cap rate it seems reasonable to me but it would be nice to hear your thoughts about it.

    2) It seems like most of the dry powder is in BP, especially if we consider the available credit line that is probably against the RE in BP. If FF Wong wants to use this cash/borrowing capacity for non-property acquisitions (for instance in the distressed O&G sector) he will have to bring this cash up to the parent but the parent owns only 51.2% so the rest will have to go as dividend. There is VIC write-up about the company where they mention that the end game for BP is to become a REIT so I would assume that using the dry powder to add a non-related business on the BP level would not serve that purpose. How do you see that dry-powder being used then? I’m afraid that the dry powder for acquisitions might be smaller than it seems when looking at the consolidated financials…

    (link to the VIC article that I mentioned: https://www.valueinvestorsclub.com/idea/Boustead_Singapore_Ltd/137878)

    3) Do you have any estimation for how much lower can the O&G revenue get? I guess that the 15-20% of it that is related to upstream is already beaten up pretty badly and the upstream revenue should be more resilient. However, in the last Q revenues seem to keep on going down in that segment at 26% clip and we are quite some time into the “capex cutting” period. It’d be interesting to read how bad do you think things can get at this division?

    Thank you so much for floating this idea and congrats on the quick gain on Geo Energy! From what I’m hearing from friends who trade coal in the region, they say that there is a real shortage of cargo in the market so that should bode well for Geo Energy…

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    1. Hi Yaniv,
      Thanks for your sharp questions.

      1) The properties are extremely conservatively valued. It’s not just the “properties held for sale”, but the “Investment Properties” as well.
      Basically, Boustead records the value of these properties at “cost less accumulated depreciation and accumulated impairment losses” (See Page 91 of AR16).
      Unless one believes that since the properties were built, the market value has dropped much more than all the accumulated impairment depreciation, it’s logical that what is recorded on the BS is way below what Boustead can get at market rate.
      Which is why there’s this $30m on the BS vs the footnote of $100m+ valuation.
      On top of that, like I mentioned, it’s not just the “properties held for sale” but the “investment properties” as well. They’re essentially the same thing! (Learnt this from a reader who emailed me and discussed this with me).
      I’ll cut and paste the reply from Boustead’s IR:
      “Our properties classified under both “Properties held for sale” and “Investment properties” essentially belong to the industrial leasehold portfolio. The difference in classifications stem from historical recommendations by our external auditors. Before the Global Financial Crisis, Boustead Projects had been selling one to two properties a year from the industrial leasehold portfolio, hence our external auditors had us classify all of the earlier constructed properties under “Properties held for sale”. However, after the Global Financial Crisis, we changed our strategy and decided to hold onto all of our properties instead of selling them. Hence, our external auditors recommended that any newly constructed properties after the Global Financial Crisis be classified under “Investment properties”. The recommendation was also not to reclassify the existing properties under “Properties held for sale” even though we would not be selling them.”

      To summarize, both are recorded at values way below what Boustead can get if they’re sold on the market now, and with Boustead’s conservative accounting, this valuation gap increases every year as long as the drop in the market value is lesser than the depreciation/impairment charges.

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    2. 2) You are absolutely right about part of the $$$ in the consolidated statements being parked in BP.
      Still, as of mrq, the Boustead consolidated statements hold $297mil of cash, and another $68mil of “available for sale financial assets”
      BP has $134mil of cash. That leaves at least $150mil of cash with the parent, with another $68mil if needed. That’s still a very substantial sum. Let’s also not forget that every quarter, Boustead generates a ton of FCF.
      I don’t see FF Wong trying to “bring this cash up” from BP to Boustead.
      BP will declare their usual dividends which Boustead will be entitled to, just like all other shareholders. But I don’t see BP trying to give excess cash to Boustead. Rather, BP will expand organically, and they’ll keep cash on their BS to do so. Prior to hiving off BP, there was a lot of chatter for quite a few years about parking it into a REIT. FF Wong has discussed this several times in many ARs in earlier years, but has previously declined to do so. Now that BP is a separate listed entity, I don’t think BP will be a REIT exactly. BP’s business model is somewhat similar to that of a REIT, but they cannot list their assets into a REIT anytime soon until they get much much much bigger. This is because SGX doesn’t allow what’s known as “chain listing”. If the REIT assets constitute a major part of the company’s financials and charactersitics, SGX deems it to be a “chain listing” and that’s not allowed.
      In short, I see Boustead looking for related acquisitions, while BP will continue with their current model of B&L.
      Also, on this note, back in 2013, Boustead has had an approved $500mil worth of MTNs that’s still untapped up to now.
      This $500mil of MTN is available for both the parent, and if Boustead deems it necessary, BP as well.
      From the announcement dated Aug 2013:
      “The net proceeds from the issue of the Securities (after deducting issue expenses) will
      be used for the refinancing of existing borrowings, potential acquisition and investment
      opportunities which the Issuer and its subsidiaries (collectively, the “Group”) may pursue
      in the future, working capital requirements and the general corporate purposes of the
      Group.”
      So for sure, Boustead has a lot of financial firepower: both existing firepower kept on the BS, as well as an additional $500mil worth of untapped firepower.

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    3. 3) Oh, I’ve absolutely no idea how low it can get. Does anyone know for sure if OPEC and non OPEC guys would agree on production limits on the 30th Nov?
      In a recent conf call, FF Wong himself said he thinks the crisis will last much longer than what the market thinks. When pressed for a more exact timeline, he said his guess is it’ll be depressed for at least 5 years. That was in May 2016, so if he’s right, we’re still in for many quarters of tough times for O&G. I wouldn’t look too much into how much revenues have dropped for O&G in each quarter, as it is obviously lumpy. On top of that, I don’t think we can predict how much it’ll drop or when the bottom is reached.
      So I’ve nothing more intelligent to add to what you already know in this regard, your guess is as good as mine.

      Geo Energy did really well, but is starting to pull back in tandem with coal prices. Coal prices are now at the highest it’s been in the last 6 yrs or so I think. That’s way too rapid a growth in too short a period of time.
      Geo Energy has an upcoming presentation for analysts and fund managers next tues (22nd Nov). I got an invite to attend, which is just simply great cos I am in the midst of reviewing the latest data and have some questions that need answers anyway. So I’ll be attending that to find out more.

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      1. TTI, Thank you for the very details answers, thats really helpful!

        As for point #3, I meant that maybe there is a portion of the energy division’s revenue that is less correlated to the price of oil, that is mainly the downstream part of the business. The AR states that many refineries are owned by the big oil co’s and these companies defer spending on the refining business due to the problems in the upstream business. However, my thinking was that since the refining business does well at an environment of low oil prices and since it is capital intensive, at least some portion of the revenue has to be related to normal maintenance, routine replacement of equipment, troubleshooting, necessary upgrades and so on. While an owner of a refinery can defer spending for some time, it can’t keep on happening forever as this equipment has to be maintained/replaced etc. I know that some of the maintenance work is not simply tightening up screws, but a complicated work that for some facilities may take unto a month and require the services of experts.

        If I’ll speak to the IR I will ask for more details about that. Like how much of the Energy’s division revenue is related to things that are recurring in nature and services that the refineries have to procure in order to keep their business running and stay competitive in terms of their refining margin.

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        1. Hi Yaniv
          Fantastic points that you’ve mentioned here.
          Their energy related division is involved in:
          – Crude oil and natural gas production
          – Crude oil and natural gas refining
          – Gas to liquids production
          – Hydrogen power generation
          – LNG production
          – Oil sands upgrading
          – Once through steam generation
          – Power generation
          – Waste heat recovery
          (Taken from AR16)
          While they do not break down the division revenue in such great detail, so we won’t know how much of it is refining, it is pretty obvious from the list above, that the bulk of it is from direct energy gathering and generation, and maintenance. Refining would be a small portion. The refiners are doing well, but beside the refiners, all the other energy players are deferring capex.
          Even then, currently the refiners margins are already starting to narrow. This is because although their “input” (crude oil) has low prices, their end product (refined oil) has increasing storage prices. There’s just simply no place to store the excess oil. So their margins have already started coming down, broadly speaking.
          You’re also right that this cannot continue indefinitely, so at some point, deferring capex too long will result in production curbs down the road.
          I havent asked IR this, but honestly, I doubt that they’ll know because a lot of their contracts with their clients span over many divisions. In fact, many of the energy players have multiple divisions i.e. you have natural gas companies that have liquid oils, and their own refining arms. So I reckon the contracts are a lot more complicated than just dividing the revenue into each division. On top of that, even if Boustead has that information, from my experience, IR wouldn’t be able to share that specific an info, unless it’s in the earnings release.
          Great points you’ve raised here!

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              1. No problem!

                Would be interested to hear of you learned anything from the presentation on 22nd Nov.
                Also, does Boustead gives transcripts of their conference calls & analysts questions? Like the US listed companies have on SeekingAlpha. Even if I don’t buy the stock, would be interested to hear what FF Wong has to say abt the energy industry.

                In my opinion, this is primarily a cyclical stock. As its two main earners (ind. properties & Energy) are cyclical. Can’t value it on earnings since they’re not recurring. So the first question to ask is, when do the Singapore Industrial Property cycle and Oil (Refining?) cycle turn?

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                1. Hi BlackCat
                  The analyst briefing was very very helpful. I was in the midst of contacting IR when I got the invite. I only needed to ask 1 question at the end of it all, all my other questions were answered by the CEO. Let’s just say that I got all my questions answered, and learnt a lot more stuff that i wouldn’t have even come close to thinking about. In fact, the data is going to change my portfolio allocation significantly.

                  I’ve listened in to all the conference calls thus far, don’t think they have transcripts. Boustead is the only local company I know that does this, and FF Wong is always very candid during the conference calls. I always look forward to it.

                  Yup, it is cyclical, and IMO, it is going to be tough for Boustead for an extended period of time. Currently, I view the BP more favorably. Sure, industrial property cycle is not on the uptrend currently, but BP has a strong competitive moat in it’s knowhow.

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