Boustead Singapore horrifying 2Q17 results

One of Singapore venerable companies, Boustead Singapore, announced a set of horrifying 2Q17 results. Net profit for 2Q17 was 32% lower year-on-year, while 1H17 net profit was 30% lower year-on-year. The infrastructure-related engineering and geo-spatial services company was still making respectable level of profits but its recent performance decline reflects the depressing state of the oil and gas sector.

Strong balance sheet

Notwithstanding the challenging environment, Boustead Singapore managed to clock in an impressive operating net cash flow amounting $48.6 million, due to cash inflows from working capital. As a result, cash and cash equivalents increased $25.1 million to $296.7 million.

Current assets stood at $500 million while current liabilities was $231 million. The total borrowings are only $90.9 million. With such strong balance sheet, Boustead Singapore is poised to ride out the storm in the oil and gas sector. The Net Current Asset Value Per Share (NCAVPS) is about $0.32, while Net Asset Value (NAV) is $0.583.

Not surprisingly, the root cause of Boustead Singapore’s poor performance was the ailing oil and gas sector. Year-on-year, its energy-related engineering recorded a 73% decline in profit before tax, while its geo-spatial technology arm recorded a 17% decrease in profit before tax. Therefore, the increase of 27% by its real estate solutions had been offset by the other two division performances.

In light of the challenging operating conditions, the management is prudent enough to curb in expenses. Total overhead expenses for 2Q FY2017 declined 3% year-on-year to $22.4 million as Boustead Singapore applied cost management measures. The company has also declared a reduced interim cash dividend of $0.005 per share, one of the lowest in the company’s history.

Management tenet

Broadly speaking, the strategy of conserving cash resources should be supported. While investors may not take this positively, such an action by the management is wise if it resulted in building a stronger Boustead Singapore in the long run. The retained profits can be used to grow new capabilities and build stronger investment moats.

Going forward, the management warned that the company will remain profitable in FY2017 but the level of profits may not match that of FY2016. This is expected because Boustead Singapore’s core business is in the oil and gas sector and it is unlikely that this sector will recover soon. In fact, investors’ sentiments for this counter is also faltering. The shares of Boustead Singapore has dropped from $1.80 in 2015 to current $0.86. An explosive value destruction of almost $1.00 per share.

To reverse its fortune, the management continues to eye merger and acquisition activities in both related business fields, as well as in potential new fields. Given its huge war chest of net cash $205.8 million and untapped $500 million medium term note programme, Boustead Singapore can certainly afford to go on a shopping spree. But then again, such tactic may not guarantee business success because there is a lot of execution risks involved.

In FY2016, Boustead Singapore had three potential acquisition targets but chose not to pursue further with the deals in the end. The management was candid enough to share the lessons learned from these unsuccessful pursuits. Although these deals did not materialize, I like Boustead’s management for its prudence and cautious approach. Indeed, acquiring a business is easy. But acquiring a great business is most difficult.

My strategy

The current weak market sentiments poses a challenge for Boustead Singapore but with its strong balance sheet and cash flow, I am sure the company can ride out the storm. Obviously the share price has corrected a fair bit, dropping from a high of $1.88 to current $0.88. The share price is expected to continue falling, so I would only enter this counter at $0.40 per share.

Magically yours,

SG Wealth Builder