1Q FY3.15 Results:

Boustead’s Ebitda, Ebit, and operating PBT before exceptional items and associates grew 33.7%, 33.6% and 29.5% for the quarter, despite revenue declining 1.7%. See Fig.A next page for P&L analysis.

Reported profit was distorted by numerous one-off gains and other nonoperating items which resulted in a 9% decline to S$16.1m. Suffices to say, investors need to stay focused on the key metric Operating PBT before exceptional items & associates, which as mentioned advanced 29.5%.

How do we view this?

Main drag on revenue was competition in the design and build space, we have flagged this threat before, but the on-going strategy to build up the industrial real estate portfolio will mitigate this.

Industrial real estate portfolio expansion plus steady growth from Geospatial continue to power improved core profitability as growth from their high margin recurring income business models make an impact on the overall P&L. We estimate Ebitda, and Operating Profit margins to reach the 20% and 19% regions by FY3.16, from 17.6% and 16% last FY.

Most encouraging was that Geospatial’s earnings could outperform in the quarters ahead as Indonesia’s usage is gathering steam as the National Spatial Data Infrastructure is rolled out – with the recent Presidential Election concluded, we are hopeful that Jokowi’s infrastructure friendly policies get pushed through, in which case we could see increased usage of Geospatial as it gets used for infrastructure planning.

Energy engineering continues to see revenue and profit growth as globally downstream energy assets are in an upcycle renewal.

Another good result from Boustead which showed that the transition to higher margin recurring income is progressing well, on track to be more than 50% of PBT by next year. Even still, there is some concern that the nonrecurring side of things is looking a little, as the orderbook backlog at S$295m is lower than S$380m at year start. Management shared that it was not concerned yet as enquiries remain robust.

Investment Action

Maintain BUY on Boustead with an unchanged TP of S$2.40, based on a 20% discount to our discounted free cash to equity model. As a matter of comparison, we did an SOTP valuation of Boustead and found a fair value of well over S$3. We continue to hold the view that Boustead is undervalued despite strong 1 year price performance.

Source: Phillip Securities Research - 18 Aug 2014