I’ve done analyzing the latest earnings results of some of the companies I own, and others that I don’t, but am following.
Thus far, most have been within my expectations, with just 1 under performing and a couple out performing my expectations.
In my posts, I try not to talk repeatedly about the same company, and instead, try to mix it up. Since it’s been sometime since I wrote about Boustead, I thought to do an update here on my thoughts on Boustead.
As with all updates, there won’t be a discussion on the superficial stuff about the company and instead, I’ll dive right in. Here are some of my earlier posts about Boustead:
I do want to point out an error I made in the post. In Part II, I wrote:
“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.”
From Boustead’s AR16 which was released after my post, a strengthening USD is negative for Boustead’s Geo-Spatial division only. As a whole though, a strengthening USD against SGD is actually a positive for the company.
Taken from page 146 of AR16:
Alright, now that that’s out of the way, let’s move on to the latest FY17Q2 results for Boustead.
I was actually positively surprised by the earnings. Sure, it dropped, but much less than I was expecting.
GPM has dropped for Q2, but it’s still in the 30s+% range, which is extraordinarily high for most other businesses. Won’t read too much into a quarterly drop.
Revenue has surprisingly, stayed the same, total profit has dropped only 1% for 1H17.
For the remaining 2H17 though, I think the drop will become much greater as the 1H had currency gains to buffer the results.
For FY17, for sure the results will be poorer compared to FY16.
But that’s not the main point of this post.
Check out Boustead’s BS:
The company now holds $297mil in cold hard cash.
I have compiled and analyzed data on the company since FY04, and this is the highest amount of cash the company has ever held.
And it’s not hard to understand why.
The business is incredibly FCF generative, a metric that I place strong emphasis on. Having had experience as both an investor and in managing businesses, FCF is something that I think is underrated.
And CF generation is something that Boustead does very well:
The company generates a ton of FCF every year. Without any major acquisitions or investments in the past couple of years, the cash hoard is now embarrassingly large.
How large is large exactly?
The total liabilities (both current and non current) is currently $332mil. Cash on hand is $297mil. The company also has some financial assets on hand that is equivalent to cash. That amounts to about $14.6mil. The company also increased it’s cash hoard by $37mil in just the 1H17.
If all these rates stay the same, this means that in another 6 months, the company can basically take the cash, and completely wipe out ALL liabilities. (not debt. I mean ALL liabilities).
Of course FF Wong won’t do that. That’s just to illustrate how much cash the company holds now.
Is this a good thing?
It depends on who you talk to.
On 1 hand, if you are looking at investing in Boustead, it sure is attractive. You know at least from a valuation perspective, your cash is buying… a lot of cash. You can’t really go wrong too much here.
On the other hand, the high cash hoard is taking a toll on Boustead’s ROE figures. The cash doesn’t return much, does it?
With multi year data like this, we can see that the ROE has steadily been dropping over the years, with a particularly steep drop in recent years.
In fact, in the last AGM, there was a surprisingly large proportion of protest votes against the reappointment of FF Wong, probably from large major shareholders who want to see the cash being put to use.
WB’s Berkshire Hathaway is famous for not distributing any dividends. WB has famously said that if the business can generate long term returns above par, why distribute capital? If the management is not able to find a use for the capital though, then it’d make sense to return cash to shareholders.
In the case of Boustead though, it’s not for lack of trying.
In the AR 16, Boustead explained 3 investment opportunities that they’ve tried to invest in, in the past year. All 3 ultimately failed to materialize.
“In FY2016, three potential acquisition and investment opportunities came rather close. The first was an announced proposed acquisition of a gas field with proven reserves in Indonesia. Its prospects were exciting and its risks manageable.
Unfortunately, we were outbid by a rival.
Sometimes, sellers lack integrity and sincere intention to conclude a deal, in this instance, trying to create a bidding war for an asset despite communicating otherwise. We decided not to engage in the bidding war although we certainly had the firepower to do so, as any additional premium paid may have significantly decreased our margin of safety and introduced unnecessary new risks.”
“The second potential acquisition (not announced) was a target in the energy sector providing engineering services for niche gas-related infrastructure. Thorough due diligence eventually uncovered that people could pose to be the biggest problem.”
“The third potential investment (also not announced) was a target in the real estate sector, where a cornerstone investor position was opened to us. Interesting as it looked, we pursued no further when detailed information was not forthcoming. Thorough due diligence is extremely important, otherwise we may end up blind-sided and that does not look pretty.”
If you try to read up or ask any analyst on Boustead’s business model, what would you get? Is it an O&G company? A real estate company? A tech company?
In my mind, Boustead is and behaves somewhat, like a hedge fund, with this guy being the hedge fund manager:
The company makes prudent investments in anything that he understands, and has visibility on how the investment will turn out in the long run.
In short, Boustead Singapore is a capital allocator.
So what does this mean going forward?
The near to mid term headwinds don’t look good for the company. Earnings for FY17 is likely to come in below that of FY16. The 1H may hold up reasonably well, but as I have alluded to earlier, that’s taking into account currency gains.
On top of that, even FY18 may not see any recovery. Even FF Wong, with his immense experience in the industry, thinks that oil prices will likely remain low for a very long period of time, much longer than what most market participants are expecting currently.
The major revenue contributor for Boustead, the industrial property arm, is thus far holding up ok too, but we all know where it’s headed. I don’t think anyone expects the industrial property market to start shooting up on an uptrend soon.
The huge cash hoard the company has, is currently like a call option on investments. When an opportunity arises, one must have the financial firepower to capitalize on it. FF Wong is usually extra cautious, such that every investment he makes has a high likelihood of succeeding.
It does mean that one has to be extremely patient though, and endure prolonged periods of mediocre returns (aka relatively low ROEs).
Doesn’t all this sound familiar? It sounds like something that applies to myself as an investor. Which is exactly why I said Boustead is like a capital allocator/hedge fund.
So ultimately, should one buy Boustead right now?
In my earlier investing thesis posted about 6 mths ago in May 2016, I wrote this:
“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.
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.
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.”
I have no idea how Boustead will perform in the next 1-2 years. My guess is that it’ll be ok, but not fantastic as long as O&G doesn’t recover. In the short term, anything can happen. If Opec is successful in it’s meeting at the end of Nov to implement production curbs, Boustead’s share price will likely react positively.
In the long run, I have pretty high confidence in the company.
So is this the right time to invest in Boustead? It all depends on one’s horizon. My opinion hasn’t changed much since May 2016. Near term headwinds are strong, but the long term future, will be very bright indeed.