My Quick Thoughts on the Net Cash, 4% Yielding Boustead.

By all accounts, Boustead hasn’t developed into a consistent grower of earnings since I got to know this Singapore stock in 2005.

A part of Boustead’s business deals with the design, build, and delivery of industrial real estate in Singapore and water-related projects. As long as they have these segments of the business, the revenue and earnings will be volatile.

Their real estate leasing and geo-spatial business provides more consistent earnings.

From early 2000 to 2010, Boustead missed the opportunity to throw their industrial property into a REIT when it was popular to do so to unlock the value for their shareholders. Since then, they been struggling to do so but have not bear any result.

The spinning off of Boustead Projects is one and didn’t yield much value unlocking. In 2021, Boustead Project managed to successfully put 14 of their leasehold properties into the Boustead Industrial Fund (BIF) and unlock some money:

This was timely as 2021 was not a good year for the engineering & construction business of Boustead Projects. Cash holdings at Boustead Projects went up from $128 million to $297 million, while borrowings went from $117 million to $2.2 million. Boustead projects still hold 25% of BIP and there should be leverage in BIP but there is not much recourse to Boustead Projects.

Given this unlocking development, out of parent Boustead’s $480 million in case, $297 is trapped in Boustead Projects. The cash can be put to better use if unlocked, and perhaps without other strategic uses, there isn’t much point for Boustead Projects to exist.

This may be why Boustead decided to offer $0.90 for Boustead Projects:

This must have made the shareholders of Boustead Projects deeply unhappy because it is very low compared to the NAV of $1.265. There may be a point to whether Boustead Projects is worth its book value but eventually Boustead offered $1.18 per share. Boustead used to own 95% of Boustead Projects. When they spin off Boustead Projects in an IPO, they drop their holdings to 51% with CEO and chairman FF Wong & family holding 19.97% stake and the rest held by public.

We have come full circle with Boustead ending up where they were almost fully owning the few segments.

Here are some of the financials I clobbered together:

Most of the figures are in millions. Boustead is valued at $453 million and sports a dividend yield of 4.2%. Not that high if you compare to our Singapore Government Treasury bills given that you are taking on equity risk.

But now, we have net cash of about $321 million and another $48 million in investment properties. There is another $199 million in joint ventures which are the properties inside BIP, perhaps the crown of the joint ventures happens to be the freehold Bideford properties in Orchard which is turn into Como hotels in Orchard. Boustead Projects owns 50% of this, which comes up to be $100 million.

That almost equals its market capitalization without including the other joint property ventures.

The other properties have 30-year leases and many have ran halfway into the lease. For the properties overseas, there is a limited lease of 50 years and the properties have ran half of those lease as well. It may be more conservative not to include the value of these properties or we have to severely discount their value.

Boustead’s current market cap of $453 million would buy the cash, part of a freehold Orchard property and we have not talked about its stream of profits and projects in the pipeline yet.

Bousteads profit is a bit unstable and remains to be seen how much of profits are translated to cash flow. If we review the past six years of profit, we can see them earning a five-year base profit of at least $150 mil, which is what we are buying them today if we only care about cash and profits.

Geospatial has been consistently making that $25-30 million a year.

Fundamentally, what may drive our returns is whether Boustead can generate earnings that last beyond the next 5 years. Ex-cash, Boustead trades at 3 to 5 times earnings depending if you use $30 mil or $45 million in earnings.

I think there is a world where we need to design and build state-of-the-art industrial buildings and require geospatial software. If you buy Boustead and it last beyond the next 3-5 years, you got a free company.

Unless management decides to take on value-destructive ventures.

A summary:

1. I think Boustead will last beyond 5 years and earn decent profits.
2. I think there is every likelihood Boustead will try new things with their cash and they might not succeed.
3. Their 4% dividend yield is safely below any of the earnings yield of the last six years. It is a good dividend yield to get for waiting.
4. Management have raise dividend by 30% in the past and likely will raise it if they are able to raise their earnings.
5. On a mixture of valuing based on what it owns and cash flow, Boustead should be undervalued.
6. There may be an absence of value-unlocking catalysts.
7. Last time, cash is a drag if a company does not have a good idea what to do with the cash. Now, that $326 million in cash can generate a lot of interest income. To give you an idea, Boustead requires $19 million to pay out that 4.2% dividend yield. Its interest income is shown below.

I currently hold a position at Boustead in my less critical portfolio, Crystalys, under Interactive Brokers Singapore. Not an inducement to trade. Please do your own research.

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