BOUSTEAD SINGAPORE

UOBKayhian on 28 Mar 2014

VALUATION

• Downgrade to HOLD with a higher target price of S$2.00 after outperformance.We value Boustead Singapore (Boustead) using a SOTP model and at 16.9x FY15F PE (ex-cash 13.4x). After share price climbed by as much as 18% since Feb 14, the upside to our target price is now less compelling. Nonetheless, we continue to like the group’s business model and see potential catalysts. We raise our FY14-16F net profit forecasts by 7% after tweaking our margin assumptions and imputing some contribution from the water division. Entry price is S$1.74.

INVESTMENT HIGHLIGHTS

• Early signs of a turnaround in water division after wholly-owned Boustead Salcon Water Solutions announced a major contract win recently. We estimate the multi-million dollar project is one of the largest the group has secured since it took a stake in the subsidiary in 2002. This will help the division sustain its breakeven to slightly profitable position after a prolonged restructuring. In our view, another contract win of similar size would provide a more meaningful impact on profitability in the short term.
• S$50m energy boost kick starts FY15 as it brings the group’s total orderbook backlog to over S$450m. The global O&G contracts secured support our investment thesis that the energy division will drive the group’s performance in the near term on the back of a global O&G upcycle. Boustead’s prequalification status for a global list of EPC contractors will allow it to capitalise on rising O&G spending. Management expects orders wins to also be driven by the shale gas boom in the US. We expect the division’s pre-tax margin to be steady at 10-11%.
• Expect a good final quarter to seal FY14 as Boustead’s 9MFY14 performance reflected an outlook that is in line with our own expectations. We continue to like the group’s business model that allows for better cost management, easier scaleability and lower capital intensity. The S$450m orderbook backlog also provides earnings visibility. The group had net cash of S$178m (34 cents/share) as at end-Dec 13.
• Potential catalysts include more contract wins, a definite turnaround in the water division, earnings-accretive M&As and a spin-off of its industrial assets into a REIT. We think new contract wins will likely come from energy and real estate, the latter of which is supported by management’s intent to grow its industrial leasehold portfolio. Additionally, we think there is a high probability of securing the S$150m AEI for TripleOne Somerset, where Boustead has a 5.5% stake in the consortium that intends to acquire the property.