FY3/14 Results

Solid full year results with core-profit growth. Management expects another year of growth ahead, despite some challenges to Design & Build business.

For the 12 months FY3/14, Core Operating Profit (EBIT adjusted for numerous exceptional items in both years) was up 7.9%y-y to S$84.8m from S$78.6m, despite Revenue being flat on-year. This was mainly due to improved margins and revenue outperformance from the Energy Engineering segment, as well as greater rental contribution from industrial properties. Orderbook Businesses (55.3% PBT):- Energy engineering had a record revenue (S$181m) and profit (S$24.8 PBT) year, up 49% and 81% respectively, as downstream Oil & Gas continues capital investment recovery. Current orderbook backlog is a healthy S$152m v. S$187m this time last year.

Water engineering happily posted another year of modest profit in this cutthroat business, registering revenue and profit of S$16.3m and S$1.1m, versus S$25m and S$1.5m last year. Encouraging thing for this business is that orderbook backlog at S$50m is the highest since FY09, and that the segment seems to have found its niche by focusing on high purity grade boiler feedwater for power producers.

Only worry is the Real Estate Design & Build business. The competitive landscape has seen new entrants emulating its D&B business model. Boustead Projects intends to address the situation by focusing on higher-end projects in the biotech and technology industry, as well as the Iskandar region. Labour cost continues to be an industry wide headwind. In the meantime, orderbook backlog still looks robust at S$174m, same as last year.

Overall orderbook backlog is respectable, at S$380m v. S$391m same time last year.

Recurring Income Businesses (44.7% of PBT)

Geospatial staged an impressive 2H recovery, post Aussie elections, as revenue & profit again pick up sequentially (S$28.4 v. S$27m q-q, S$6.5m v. S$6.1m q-q). Management also shared that Indonesia grew 54% for the year while Singapore grew 28% for the year. These are signs that Geospatial will regain its growth rate which was impacted 1H FY3/14 by the change in Aussie government and depreciating AUD.

Industrial Property Portfolio on track to grow from 105k sqm (FY3/14) to 122k sqm (FY/15) to 159k sqm (FY16).

Recurring Income as a proportion of total PBT is likely to cross the 50% mark for FY3/15.

Investment Action

Maintain BUY with a raised target price of S$2.40, as:

1. Core-EPS (excluding one-off items) is likely to accrete from 13.1c to 14.2c to 15.1c (FY3/14, FY3/15f, FY3/16f) based on the current orderbook backlog, growth in Geospatial, as well as expanding rentals from the Industrial Properties. Roll over our 2-step DCF of core-earnings growth over this FY and the next, followed by terminal growth of 1% sends our valuation close to S$3.00, taking a 20% conglomerate discount gives us a target price of S$2.40.

2. As the Industrial Property Portfolio increases in size, the undervaluation of Boustead progressively steepens at current price – see Fig. A – valuing the underlying business at a shocking 4.4x by FY3/16.

3. The odds of a catalytic event (REIT) to unlock the value of this portfolio is high as well, as Boustead has ~S$250 net cash and liquid investments, as well as a S$500m multi-currency debt issuance facility, to act on any opportunities for the portfolio to achieve scale.

4. Other catalytic event could be an announcement to develop its 35% stake in 120k sqm of industrial land in Nusajaya, Iskandar.

Source: Phillip Securities Research - 28 May 2014