Value hunting #4: Boustead

Attracted by this company's net cash position of 20c, with a share price of 71c. The company has been growing profit at least since 2003. FY08 EPS was approx 9c/share (accounting for share split and extraordinary item) or 58m total.

Note for calculations: the share split in Aug 08. Pre-split had 260m shares, post split 520m. Mkt cap @70c will be 364m.

Historically the company was a mish-mash of unrelated businesses, owning among other things, a sushi deli. Management sold off the unrelated business and started concentrating on their core competencies in 02/03.

1) What does it do?

Boustead has two business segments:

• The smaller one (15% of revenue, 21% of profit)is from Geo Spatial (Provision of geographical mapping IT services). 90% of their clients are government, and 60% of the revenue is recurring.
  
• The larger one (70% revenue, 60-80% of profit) is engineering services, divided into 3 parts: a) energy, consisting of oil and gas projects and solid waste conversion, b) real estate solutions: building industrial and residential facilities, and c) water and waste water: small new segment, not yet profitable.
  

2) Balance sheet
Negligible debt. Small operating lease commitments, roughly 3m a year.

In 1Q08 (June 08) results, they have 140m cash. Subtract 28m for taxes and some more for working capital, as a rough guess, I get 100m, which equals about 19c/share nett cash.

Boustead's 40% owned associate GBI has confirmed the 200m sale of an industrial property to SEB Asset Management (the investment arm of a European bank). Slated for completion end of the year. Fingers crossed the cash actually comes through... in these wild times. When it does, this will add another 15c/share cash to Boustead's balance sheet.

3) Cyclical Aspects
Common sense suggests their engineering business is cyclical, and risky:

• Large amounts of money/credit are required to fund infrastructure.
• Revenue is project based, not recurring. The products they produce are not consumable.
• Revenue and profits are recognised for as % of project completion, however there may be credit risk. It isn't over till the cash actually changes hands.
  

How does a recession affect their profits? From their FY02 AR (March 02), which nicely covers the 4 quarters of negative growth in that recession: For their construction projects:

"However, gross profit margin was eroded from 29.7% of FY 2000/2001 to 19.8% of FY 2001/2002 because of the generally soft construction industry that was weakened by excessive competitive pricing."

Applying these same gross margins to their entire FY08 profit I get a profit of 17m. Blending it with an unchanged profit for Geo Spatial (taking it as 20% of the profit) gives 25m, or approximately 5c a share.

The above is guesswork for a bad but realistic scenario. A worst case one would involve losses, which I cant model because too many factors.

I have not been able to find their results way back from from the Asian Financial crisis.

4) Conclusion:
At 70c per share, minus net cash of 40c, and with a EPS of 5c, this would still give a PE of 6.

If we ignore the Engineering Services completely (because it is too hard to model), and just take the Geo-Spatial profit (2c/share), their PE at 70c would be 15, and at 60c it would be 10.

There are too many unknowns to be certain, but my gut feeling is that this is OK..... Cash only, no CPF due to the cyclical and risky nature of their business. Definite buy at 60c. Mabye 70c, not sure....