Boustead Singapore Limited (SGX:F9D) has been a big winner over the last five and half years. The total return for the company was 434% from 31 March 2009 to 2 September 2014. By comparison, the capital gains of the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI), was only around 95% for the same duration. Although the returns from Boustead has been satisfying, as Foolish investors, we should look under the hood to understand what the business drivers for this move in the share price could be. In the process, we might…
Boustead Singapore Limited (SGX:F9D) has been a big winner over the last five and half years. The total return for the company was 434% from 31 March 2009 to 2 September 2014. By comparison, the capital gains of the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI), was only around 95% for the same duration.
Although the returns from Boustead has been satisfying, as Foolish investors, we should look under the hood to understand what the business drivers for this move in the share price could be.
In the process, we might even figure out the answer to a more important question: Can this growth continue?
A closer look
Boustead is a technology group focused on geo-spatial solutions and infrastructure-related engineering. Within this general classification, there are four major divisions. These are Real Estate Solutions; Energy-Related Engineering; Geo-spatial Technology; and Water & Wastewater Engineering. A good description of each segment was covered by my colleague Ser Jing.
The development of sales by division for the company’s past five completed financial years is shown in the chart below.
For the financial year ended 31 March 2014 (FY2014), Real Estate Solutions made up about 41% of Boustead’s total revenue, making it the largest division by sales. Energy-Related Engineering is the second largest with a 35% share while Geo-Spatial Technology and Water & Wastewater Engineering contributed 21% and 3% respectively.
The Energy-Related Engineering and Geo-Spatial Technology business divisions seem to represent the more stable revenue element in Boustead’s portfolio. The Real Estate solutions segment has been its largest sales contributor in terms of percentage for the last five years but has recently found more competition within the Singapore market. Finally, the Water & Wastewater engineering division, between the four, has been a laggard due to high competition within its industry.
Ideally, we would like to see profits rise together with the revenue increases. From the chart below, the Geo-Spatial Technology division provided the highest pre-tax profit margin out of the four. However, most of the profits still came from the Real Estate Solutions division by virtue of its higher revenue base. Again, the Water & Wastewater Engineering segment proves to be the laggard.
For a forward looking view, we can refer to the company’s latest earnings report. Boustead happens to be one of the uber cool companies in Singapore’s share market which shares its analyst briefings online and it even takes questions from individual investors. But before I discuss the company’s future plans, we have to first take a look at the development of its order book by financial year. The order book is important as that’s where part of the company’s future revenue is coming from. The outstanding order book backlog currently stands at $380 million.
For the case of the Real Estate Solutions division, the company is pursuing opportunities outside of Singapore. One of the initiatives in view is a new strategic partnership in Iskandar Malaysia. Boustead is also focusing in niche areas such as data centers, bio-tech, and aerospace facilities within Singapore.
On top of that, Boustead recently announced a new partnership for its Real Estate Solutions division. On 28 August 2014, the company revealed that it would be working with the Abu Dhabi Investment Council (ADIC) to develop modern logistics and high quality industrial facilities in Singapore. The initial joint equity investment for this partnership will be S$250 million, split equally among the duo.
But despite the positives, it’s also important to note that during the earnings briefing, Boustead had budgeted for revenue to be flat for the division in FY2015.
The outlook for the Engineering-Related Engineering division is much brighter. The order backlog for this segment remains strong, moving into the current financial year (FY 2015). The same brighter outlook is expected for the Geo-Spatial Technology segment where the second half of FY 2014 has already been strong. More hiring is expected here, therefore margin might be impacted in the short term.
Lastly, the Water & Wastewater Engineering is expected to remain challenging. So, it’s a good thing that it’s only 3% of overall sales. Interestingly, Boustead’s management also shared that the company had made a tidy profit of almost 200% from selling its S$4 million investment in HanKore Environment Tech Group Ltd (SGX: U9E).
As a last note, Boustead has stated its intention to create a real estate investment trust with its portfolio of properties. According to a news report from The Edge, the property portfolio is currently worth around S$300 million. While there is no definite date yet, the groundwork is being put in place.
Boustead trades at a price to earnings (PE) ratio of around 13 based on its closing price of S$1.79 yesterday and has a 3.9% dividend yield based on the trailing twelve months dividend per share of S$0.07. On a PE ratio basis, this is lower compared to the STI ETF’s current PE ratio of around 14. The company also has a really strong balance sheet; as of the end of FY 2014, it has a net cash (total cash net of all bank borrowings) position of S$165.9 million and held-for-trading and available-for-sale investments of S$82.1 million.
As lifelong students of Foolish long-term investing, it pays to look under the hood to understand whether a rise in a company’s share price is supported by the quality of growth that we are looking for.
In the case of Boustead, the growth of its Energy-Related Engineering and Geo-Spatial Technology division may be where Foolish investors might want to keep their eyes on as they represent a stable, growing element of the company’s business. The overseas expansion from the Real Estate Solutions division will also give some clues on Boustead’s future growth.
In all, the future profitability of the company might depend on profitable growth within the three divisions.
To learn more about investing and to keep up to date on the latest financial and stock news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can grow your wealth in the years ahead.
Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.