Wednesday, March 22, 2017

Boustead Projects

BP has 2 businesses:
  • Design-and-Build: Undertake construction projects to design and build industrial properties for clients.  This is project based, so is lumpy.
  • Leasing: Lease industrial properties to clients.  This is recurring.
Breakdown of profit segments:

Theses two ways of looking at this company: as an asset play (buying $1 for 50c), or as a cyclical play (buying near the bottom of the industrial property market).

As an Asset Play


BP holds its assets on the balance sheet at less than market value.  Considerably less, in fact.   Going through the items:
  • Properties held for sale (4 in SG, 3 in China) are held on the 3Q17 balance sheet at 30.5m.  However they have a 2016 valuation of $103m ($107m for 2015).  This is based on "income and comparable sales".
  • Investment properties (all in SG) are held at 141m, but their 2016 valuation is 259m (265m in 2015).  
  • Since the 3Q17 results have been released, a stake in Triple-One Somerset has been sold, with an 8m profit (before tax).   This is recorded on BS as Available for Sale Financial Asset at 17.8m.  Assuming a PAT of 6.5m, this gives 24.3m.
  • There is another financial asset for sale held at 22m, but this is a share of a China project.  Impossible to value, so ignore it.
  • Also ignore investments in Joint Ventures (15m).
  • Looking at current assets & liabilities (working capital, receivables/payables, WIP, deferred tax) gives -10m.  Small enough to ignore.
  • No borrowings.  Net cash 9m.  Small enough to ignore too.
With 320m shares outstanding, that gives $1.13 per share.

As a Cyclical Play


  • Subtract the Triple-One Sommerset stake, sold for 7.5c/share from the market cap.
  • Assume they sell their 'Properties-held-for-sale' at 50% of the market value.  Thats 50m, or 15.6c per share
  • Assume their leasing revenue then drops proportional to their market values, as those properties sold were previously being leased out.  Now the leasing business is earning 11m a year (before tax), or 3.4c/share.
  • At an 80c share price, minus the first two items above, this makes it 17X before-tax-earnings, just for the leasing business.  These are recurring earnings.  And we get the highly cyclical design-and-Build business for free.

The Industrial Property Cycle

The industrial property market is cyclical, and past downturns have been long and painful:

(Source: Singstat)

One reason for the downturn is excessive building bought about by endless QE.  This will peak this year:

The other reason for property market downturns is lack of demand.  The chart below overlays recessionary periods onto the industrial property index:

So recessions are not the sole cause of property cycle downturns.

DBS expects "further weakness till the end of 2017 before bottoming out from 2018 onwards."  Unless there's a recession, in which case all bets are off.

My expectations are:
  • No recession soon, probably a mild global recovery in the next 6 months.
  • But property supply has exploded due to 7 long years of low interest rates.  This is now reversing, so we can expect the downturn to be long and deep.
Though its tempting to buy due to the discount to asset values, I'll wait till the end of the year at least.   This is my gut feeling, or judgement call.  Or I'll wait until the price drops enough that its irresistible.  And I need to remind myself that markets look forward, and we want to buy before things get better - we want to buy when they are getting less worse.

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