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).

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.

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.

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.

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.

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