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Does Boustead Projects Have a Strong Business Model?

Boustead Projects Ltd (SGX: AVM), or BPL, is an industrial real estate solutions provider with engineering expertise in the design and build and development of industrial facilities for multinational corporations and local companies. BPL is a 53%-owned subsidiary of Boustead Singapore Limited (SGX: F9D).

I wanted to review BPL’s financial metrics and ratios to assess if the business has a sturdy and dependable business model. This is important for investors to know if they wish to consider investing in the group over the long-term. I looked into three areas – gross and net margins, free cash flow (FCF) generation, and return on equity over five years.

Gross and net margins

BPL has a 5-year average gross margin of 26.4%. The spike in the fiscal year 2018 was due to cost savings from several projects that were recognised in that year. Otherwise, BPL’s gross margin is steady at around 20% to 25% region. As gross margins are a reflection of pricing power, this shows that BPL can maintain pricing over the years and has a strong business moat.

Net profit margin averages 12.9% over the last five years, and this is a decent level of net margin for a contractor cum developer. Net profit margin above 10% also shows good expense control on the part of management.

Free cash flow generation

BPL generates consistent FCF every year, with the exception of the most recent fiscal year 2019. This can be explained as BPL had reported a record order book of S$660 million as of 31 March 2019 (fiscal year end) and a lot of cash was locked up in working capital (i.e. contract assets). Capital expenditure for BPL is usually very low at less than S$1 million but it jumped to S$4.8 million for FY 2019 due to deposits paid for property, plant and equipment.

Aside from the one-off negative FCF in FY 2019, BPL has demonstrated that its business model can churn out consistent and stable FCF.

Return on equity

The final and arguably most important metric is the return on equity or ROE. This metric measures the profitability per dollar of equity for the group. BPL’s five-year average is at 12%, and a double-digit ROE is usually a sign of a healthy and profitable business.

A strong and dependable business model

The above metrics demonstrates that BPL has a sturdy and reliable business model. With a record order book announced in its last fiscal year, investors have much to look forward to in the coming years as the group delivers on their contracts and also boosts its recurring rental income stream.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang owns shares in Boustead Projects Limited and Boustead Singapore Limited. The Motley Fool Singapore has recommended shares of Boustead Projects Limited and Boustead Singapore Limited.