Boustead Singapore

UOBKayhian on 10 Feb 2014

Cash-Rich Think Tank
Boustead Singapore (Boustead) has four main business segments. It is an engineering firm for industrial real estate, energy and water plants, and is an exclusive distributor of a widely-adopted geographic information system (GIS) in Australia and South Asia. The group specialises in value engineering – offering project management, design and consulting services that realise cost and time savings for customers, while outsourcing construction requirements. Its GIS technology is used by both government and non government entities, where Boustead holds an aggregate 80% share in its markets. Recently, the group has also focused on building its industrial leasehold portfolio with
plans to transfer them into a REIT in the future.

INVESTMENT HIGHLIGHTS

• Initiate coverage with a BUY; target price of S$1.94 represents 17% price upside. Our target price is based on a SOTP model. We like Boustead’s high net cash position (25% of its current market capitalisation) that we think the market has not fully accounted for. Its cash-generative geo-spatial business will continue to dominate its markets while recurring rental income from its growing industrial portfolio will mitigate potential weakness in the industrial property space. The energy division’s global reputation will draw projects from the US shale gas boom and strong regional demand. The group pays out 5 S cents of ordinary dividend annually (3% yield). Our fair value implies a FY15F PE of 17.5x (ex-cash 14x, ROE 17%).
• Business model requires low capital intensity as the group outsources the highrisk construction and fabrication component of its projects. We think construction firms are threatened by rising raw material and labour costs, and face intense competition from foreign contractors. We like Boustead’s focus on management, design and engineering, which partially insulates it from the risk of cost overruns and heavy capex. The group budgets an annual maintenance capex of S$5m in comparison to operating cash flows that averaged S$60m in the last six years.
• Scaleability is an advantage and an opportunity as Boustead’s engineering solutions can be applied to a wide range of businesses in each respective industry and its capacity is unbounded by raw material constraints. We think the group can ride on the energy upcycle with its available resources and it will be able to support a high single-digit growth in its GIS solutions-based geo-spatial business. Its expertise in industrial developments can also be applied to commercial, residential and hospitality, where it has already made inroads.
• M&A opportunities in energy and real estate divisions that could provide synergies to the group. We would look more favourably on deals that would fall under Boustead’s four business segments rather than a new sector. We also agree with management that potential targets or partners must have good cash flow, management involvement and be earnings-accretive. Funding for future M&As will be supported by its strong cash balance and S$500m MTN programme.
• Key risks include cyclical risk, foreign exchange risk, execution risk, shortage in skilled talent and political risk in Libya.