Thursday, November 14, 2013

Boustead : Plenty of Catalysts ahead! (Phillip)

Boustead Singapore
Target Price (SGD) 2.05
Closing Price (SGD) 1.445
Plenty of Catalysts ahead!

 Company Overview
Boustead operates market leading infrastructure related businesses: Geospatial Technology (29% PBT), Industrial Property Design & Build + Property Portfolio (42%), Water & Wastewater Engineering (1%), and Energy (28%) Related Engineering. Boustead also generates strong excess cash.

•1H FY3/14 results saw revenue increase 7.3%y-y as energy contracts led the way, but EBITDA only rose 4.9%y-y as margin expansion from Energy Engineering and greater recurring rental income were offset by margin compression at the Design & Build level (greater competition) and Geospatial business, which was impacted by the change of Aussie government, further compounded by currency depreciation. Final PATMI was further artificially depressed 3%y-y due to an unusually low tax rate in FY3/13 giving rise to higher base effects. Main drag was Geospatial but we view this as a one-half event and expect revenues and margins there to normalize once the present government settles in. We continue to be positive on the core-underlying businesses and emphasize key developments below.

Investment Action: Plenty of catalysts ahead!
• Maintain BUY with a raised TP of S$2.05 from S$1.935 as:
1. Orderbooks are at record levels: S$445m vs S$288 y-y.
2. More than 60,000 sqm of industrial portfolio are in the development pipeline, progressively ramping up recurring earnings from rentals (S$15.3m, S$20.6m, S$26.9m est. y-y till FY3/16) and taking Boustead more than two-thirds of the way to unlocking its real estate value (est. S$419m) in a REIT.
3. Exciting Industrial Property Development in Iskandar Malaysia, as Boustead recently took a 35% stake in a JV with Malaysian builder AME (35%), Tat Hong (25%), and CSC (5%), with plans to develop 120k sqm of prime industrial land in Nusajaya.
4. High net cash and free cash generation raises the prospect of more industrial properties to be added.
5. Boustead is deeply undervalued but with realizable catalysts above – P/E ex net cash ex properties is 4.8x for the Energy, D&B, and Geospatial business!

1. Boustead’s order backlogs are at record levels (table below). EPS for FY3/14 has been revised lower to 13.1c from 13.8c due to margin compression in the D&B business, disappointment in Geospatial, and some share dilution due to a strong take up of the scrip dividend scheme, but record high order backlogs (coupled with portfolio rental additions and geospatial recovery) may see earnings rebound to 16.6c in FY3/15. We do not see weakness in Geospatial Australia to persist seeing as the system has almost full penetration across the Australian government and its agencies. As with most IT platforms, stickability is high due to operational risk from switching.

2. More than 60,000 sqm of Industrial Portfolio Space to be added progressively till FY3/16, will boost recurring rental income significantly every year.

3. 120,000 sqm of Industrial land to be developed in Iskandar Malaysia – Nusajaya – Southern Industrial & Logistics Clusters (SiLC). Mention Nusajaya and the coveted Horizon Hills, Legoland, Puteri Harbour, Marlborough College comes to mind. Boustead therefore has a 35% stake in a much desired location that has limited industrial zoning apart from the SiLC. To note, Malaysia does not have a formal plot ratio policy, which means this development can be very creative in maximizing value (other mixed uses) while keeping in line with industrial zoning. As plans for the development are not yet announced, we have not factored in what is potentially a major catalyst into our forecasts.

4. On track to unlock Industrial Portfolio value. Boustead’s portfolio is on track for about 159k sqm in total leasable area. Which puts it at about 71% of the
size required to list, if the recent Viva Industrial Trust (~223k sqm) is anything to go by. Given that in less than half a year 60k sqm was added, we do not underestimate Boustead’s ability to grow the portfolio size very quickly either by development or acquisition. Their strong net cash position (S$219.7m as at 2qFY3/14) and free cash generation (table below) gives them plenty of firepower to do so.

5. Boustead is compellingly undervalued. Market Cap is S$744m as of last price S$1.445 and 515m shares outstanding. Less off our FY3/14f net cash of S$225.2m. Less off the property valuation of S$238m which only counts 94k sqm to be operational this FY3/14 (i.e. does not count the full 159k sqm by FY3/16). Then the rest of the business – the Energy Engineering, the Design & Build, the Geospatial – is valued at just S$280m for their combined S$58.2m of after tax earnings, or just 4.8x P/E. From an EV/EBIT perspective it is just trading at 6x. This is crazy value for what are global (energy engineering) or regional (geospatial) niche businesses. Listing of the industrial portfolio may be a way to unlock this value.

We stick to our Free Cash to Equity valuation, although we do introduce a Sum-of-the-Parts valuation as a check. Boustead is a conglomerate and the standard method is to SOTP conglos. However, we feel this method does not take into account Boustead’s tremendous free cash generating ability which lends itself to measuring the company’s intrinsic worth. At the end of the day, what can you take out of a business except the excess cash it generates? To this end, Boustead is the right business. Thus we’ll stick to the FCFE valuation which is an intrinsic valuation rather than a relative valuation method like SOTP.

In our FCFE valuation, we did a study on the average returns of the FSSTI and found it to approximate 9% yearly including dividends, not 10% as previously used. Risk free rate remained at 3.1%, the yield to maturity of an SGS 10yr bond. We also applied a terminal growth rate of 1% rather than 0% as the later is a tad unrealistic given that Boustead has had a strong track record of growing earnings, and that the revenue mix is tilting toward more recurring income of portfolio rentals and Geospatial. The ensuing valuation comes to be a whopping S$2.93, to which we apply a 30% discount to arrive at our TP of S$2.05. It should be noted that at the current price of S$1.445, Boustead is trading

at 51% discount to intrinsic value, and makes a compelling case for a long term holding of the stock.
In our SOTP check, in reference to Fig. A below, we valued the Energy business at 8x PAT despite competitor Foster Wheeler trading at 20x, but granted we’ll take the discount as Foster Wheeler is a much larger energy engineering entity. We valued the Design & Build business at 8.2x, in-line with its listed competitor Soilbuild. For Geospatial we valued at 12x, a 40% discount to the 20x earnings a cash-generating, growing, IT company is likely to trade at (e.g. Silverlake Axis). We apply the 40% discount as Boustead’s Geospatial business does not own its technology despite the strong economic moat it enjoys for having exclusive country distribution and servicing agreements with ESRI. The industrial portfolio was valued at FY3/14 portfolio size of 94k sqm, not counting the impending pipeline and Iskandar JV. Adding cash net of debt brought the SOTP valuation of Boustead to be S$2.01, not far from our 30% discount to intrinsic valuation of S$2.05.

Source/Extract/Excerpts/来源/转贴/摘录: Phillip-Research,
Publish date: 12/11/13

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