Boustead Singapore Ltd - CIMB Research 2016-08-16: Negatives likely priced in

Boustead Singapore Ltd - CIMB Research 2016-08-16: Negatives likely priced in BOUSTEAD SINGAPORE LIMITED F9D.SI

Boustead Singapore Ltd - Negatives likely priced in

  • 1Q17 core net profit was in line, at 26% of our FY3/17 forecast. Core net profit fell 29% yoy due to lower, albeit positive, profit from energy-related engineering division.
  • Group order book was at a 5-year low of S$277m (US$204m) at end-1Q17 (energy-related engineering: S$95m, industrial real estate design-and-build: S$182m).
  • Pure cash position of S$171m (US$126m) at BSL level (42% of market cap) at end-1Q17; Slight net cash position at separately-listed BP level.
  • Maintain Add with unchanged TP of S$0.85, based on 25% discount to FY17 SOP (we have conservatively written off the value of the energy division in full).

Lower 1Q17 core net profit within expectations 

  • Boustead Singapore Ltd’s (BSL) 1Q17 revenue of S$113.7m (US$84m) was 3% lower than the S$116.7m in 1Q16. 1Q17 reported net profit of S$7.0m (US$5.1m) was 11% higher than the S$6.3m in 1Q16, mainly due to non-recurring FX gains. 
  • After adjusting for all one-off gains/losses, group core net profit fell 30% yoy, due mainly to lower contribution from the energy-related engineering segment, which was partly offset by higher profit from industrial real estate and geospatial technology segments.

Industrial real estate: higher profit on expanded leasehold portfolio 

  • 1Q17 net profit of Boustead Projects (BP), the group’s 51%-owned industrial real estate arm, rose 25% yoy due mainly to higher contribution from the leasing business. 
  • Design-and-build business continued to see margin pressure in 1Q17 due to stiffer competition amid slower demand for industrial space. 
  • BP plans to stay focused on high value-added sectors (aerospace, data centre, R&D, etc), in which it has competitive advantages due to the high entry-barriers, and will continue to pursue overseas expansion.

Energy-related engineering: positive pretax profit is happy surprise 

  • The positive, albeit substantially lower yoy, pretax profit of S$0.7m (excluding FX gains) is a happy surprise to us, as we previously wrote off our profit expectations for the division in FY17-19F. 
  • In order to navigate the challenging landscape, management has adopted very stringent cost controls, including right-sizing its workforce to less than half of its peak level. 
  • We believe that the risk of the energy division running into big losses is low, given the business’s negligible capex needs and scalable overhead expenses.

Geospatial technology: decent growth despite adverse FX impact 

  • The strong demand for Esri Technology in Australia and Southeast Asia continued to drive the division’s revenue and pretax profit growth, up 4% and 28%, respectively, in 1Q17. This offset the adverse FX impact from the weaker A$ (Australia formed 70-75% of the segment’s total sales in FY16). We expect high single-digit pretax profit growth for the division in FY17-19, driven by rising demand from national defence and smart city/nation initiatives in Australia and Southeast Asia.

Negatives likely priced in, strong balance sheet for potential M&As 

  • We maintain our Add call on BSL, as we believe all visible negatives have been priced in. Our target price is unchanged at S$0.85, based on a 25% discount to FY17 SOP. 
  • For conservative purposes, we have fully written off the valuation for energy division. Given its strong pure cash position of S$171m (US$126m, 42% of market cap) at BSL level at end-1Q17, management is prudently looking for potential M&A opportunities. 
  • Successful M&A execution is a potential re-rating catalyst, while FX fluctuation is a key risk.

William TNG CFA CIMB Research | Roy CHEN CFA CIMB Research | http://research.itradecimb.com/ 2016-08-16
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.850 Same 0.850