Boustead Singapore -Boatloads Of Cash. What’s Next?

31) Boustead logo 29052016

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:

Boustead Singapore Part I

Boustead Singapore Part II

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:

294) Boustead AR16 Page 146.jpg

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.

295) Boustead FY17Q2 earnings.jpg

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:

296) Boustead's cash FY17Q2.jpg

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.

297) Boustead's long term cash holdings.jpg

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:

298) Boustead FCF generation from FY08.jpg

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?

299) Boustead ROE.jpg

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.”


MY THOUGHTS

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:

300) Boustead FF Wong picture on boat.jpg

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.

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5 comments

  1. Hi TTI
    For Oil & Gas company, I am currently looking at Baker Tech, a company that designs and manufactures upstream marine offshore equipment and service for oil and gas industry mainly, exploration companies in Singapore, China, Middle East and other parts of Asia Pacific. Just a quick share of info base on its Q3 results:
    ncav: 90 cents/share,
    nav: 198cent/share
    cash/share: 55 cents
    net cash/share: 45 cents
    current share price: 67 cents
    The operating cash flow of this company is still negative for the past 2 financial years and expected still to be in red this coming financial year result report due to the headwind in O&G industry.
    The reasons this company attracts my attentions is its rock solid balance sheet and consistent dividend paid out (even during industry downturn)
    The management also seems to be quite capable of making good decisions for its past acquisitions:
    -York Transport Equipment Asia was bought for SGD 14.09mm and in 2007, TRF Singapore acquired 51% stake for SGD 16.575 mm, remaining 49% was sold in 2012 to SGD 22.17mm.(http://www.trf.co.in/media-corner-mainmenu-33/press-releases-mainmenu-334/410-trf-acquires-balance-stake-in-york-transport-equipmentasia-singapore.html)
    -In 2007, bought 100% stake in PPL Holdings for SGD 3.6mm in cash and, in 2010 sold to QD Asia pacific for USD 116mm (ROI 3000%).(http://www.seatrade-maritime.com/news/asia/PPL-Holdings-price-cut.html)
    -In 2011 & 2012 acquired 10.5% stake in Discovery offshore for SGD 18.8mm + SGD 1.4mm additional to increase stake to 20%, in 2013 sold for SGD 40mm (ROI close to 100%)

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    1. Hi Wang NX,
      Havent analyzed Baker Tech before.
      But if the operating CF is -ve for the past 2 years, I think that’s a big factor that’ll weigh on my analysis. You’ll have to figure out why is the operating CF -ve. I can accept -ve FCF for a few quarters, because business have to invest and sometimes you need to commit to substantial Capex and only see the benefits a while later when your PPE investments start churning out returns.
      But -ve Operating CF is a different ball game. Unless there are visible, identifiable and quantifiable reasons for the operating CF, otherwise, it means that in the current climate, the business is unsustainable.
      So if you are investing, this means that you have to expect the operating climate for the business to improve.
      If it doesn’t improve and the downturn is prolonged, how must buffer does the business have to sustain? It can still be a good investment if you think the business has sufficient buffer (perhaps a large cash hoard? Or ironclad credit lines?) , or if you think the downturn won’t last very long or is ending.
      All the other things that you mentioned, (good track record of getting a good ROI in their investments and acquisitions), are only relevant if they can sustain their core operations.
      If the core business has constant long term -ve operating CF, even if their investments are good, this is like swimming against the tide. They get swept downstream constantly by the tide, but once in a while realize massive gains in their investments and this pushes them all the way upstream…. but the current constantly keeps pushing them down again.
      So just from what you said, I guess the main thing I’ll look at is why the operating CF is constantly -ve, and if that is just the nature of the business, how likely are their investment merits going to “cover” this constant erosion from their core businesses.
      On a related note, in the coming quarters near term, I think there’s some reprieve for auxillary supporters for the O&G business. The drillers have delayed their Capex for a few years now, since the collapse of oil prices. You can only delay capex for so long. My opinion is that we’ll see at least a short term boost as companies have to start spending to maintain, service and replace their equipment.
      Whether this will translate into a longer term recovery is anyone’s guess, but there should be some support short term. I got this from friends in the industry.

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      1. really appreciate your quick and detailed replay, the negative cash is really a formidable hurdle for the company to overcome even it is vey cash rich. soon or later it will suck all the cash if the operating activity keeps burning companys cash pile. i will monitor closely and report back if there is any improvement in future . thanks

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