Boustead Singapore Ltd

MIC (P) 194/11/2012 Ref. No.: SG2013_0042 1 of 15

Boustead Singapore Ltd.

Economic Moat & Market Leaderships Bloomberg│Reuters │POEMS BOCS SP │BTSS.SI │BOC.SG Industry: Infrastructure

Phillip Securities Research Pte Ltd

25 February 2013

Report type: Initiation Company Overview Boustead operates market leading infrastructure related businesses: Geospatial Technology (30% PBT), Industrial Property Design & Build + Property Portfolio (60%), Water & Wastewater Engineering (0%), and Energy (10%) Related Engineering. Boustead also generates strong excess cash. Company Background Boustead’s modern history can be traced to CEO Mr. Wong Fong Fui’s control of the company since 1996. Core business focus since then has been: 1. Geospatial Technology Division has exclusive country

license in Australia, S’pore, Indonesia, Malaysia and 3 other Asian countries, to distribute and service support, world leading geographical information systems (GIS) by ESRI Inc. ESRI, which has 41% global market dominance is the gold standard in GIS. GIS is data populated geographical mapping, which forms the basis for governments and large corporations to both plan and real time optimize infrastructure and other assets.

2. Industrial Real Estate Solutions designs & builds high value added industrial property for MNCs on a full turnkey basis – from architecture, industrial design, civil & structural engineering, construction project management, to TOP. Only two other known competitors have such one-stop shop (full turnkey) capabilities. Division also owns a growing industrial property portfolio.

3. Energy Related Engineering is a global leading specialist (3 other competitors globally) in direct-fired process heater systems (the heart of the refining process) and waste heat recovery systems for the downstream oil & gas and petrochemical industries.

4. Water Related Engineering designs, engineers and constructs turnkey water and wastewater treatment plants for industrial and municipal applications.

Investment Actions We initiate coverage on Boustead with a BUY recommendation at S$1.27 (9.4x p/e and 5.5% yield, FY03/13f EPS, DPS), with a discounted free cash to equity derived fair value target price of S$1.80 (13.4x p/e and 3.9% yield FY03/13f EPS, DPS), based on the following investment merits. Investment merits Geospatial earnings, which drives over 30% of Group PBT, is likely to see earnings dependably grow at 12-13% CAGR under impressive economic moat conditions. Industrial Portfolio to expand by 35% from 75.3k sqm to 101.8k sqm, will boost recurring rental income from S$13.5m to an estimated S$18m. Recurring Income set to rise, margins expand: Between

Boustead Singapore Ltd.Rating 1 Buy- Previous Rating n.a. Not RatedTarget Price (SGD) 1.800- Previous Target Price (SGD) n.a.Closing Price (SGD) 1.270Expected Capital Gains (%) 41.7%Expected Dividend Yield (%) 5.2%Expected Total Return (%) 46.9%Raw Beta (Past 2yrs weekly data) 0.61Market Cap. (USD mn / SGD mn) 525 / 650Enterprise Value (USD mn / SGD mn) 381 / 4743M Average Daily T/O (mn) 0.352 week range (SGD) 0.85 - 1.33Closing Price in 52 week range

Major Shareholders (%)33.0

9.3 3. Saiman Ernawan 8.8

Key Financial SummaryFYE 03/12 03/13f 03/14f 03/15fRevenue (SGD mn) 409 530 478 492Net Profit (SGD mn) 56 68 63 66EPS (SGD) 0.110 0.135 0.126 0.131P/E (X) 11.5 9.4 10.1 9.7BVPS (SGD) 0.50 0.56 0.62 0.69P/B (X) 2.5 2.3 2.0 1.9DPS (SGD) 0.050 0.070 0.066 0.069Div. Yield (%) 3.9% 5.5% 5.2% 5.4%Source: Bloomberg, PSR est.*All multiples & yields based on current market priceValuation MethodFree Cash Flow to Equity (Re 9%, Rf 3%, WACC 8.8%, terminal 0%)

AnalystJoshua [email protected]+65 6531 1249

2. Chartered Asset Mgt1. Wong Fong Fui

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Boustead Singapore Ltd. Singapore Equities Research 25 February 2013

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Geospatial’s predictable growth and Boustead’s industrial property portfolio, recurring income is set to rise from 42% PBT this FY to over 50% PBT in 2 years (see Pg.8). Industrial D&B: We expect a strong flow of D&B contracts as Singapore upgrades to the next phase of high value-added industrial space replacing older lower value-added space moving out. Boustead, one of three full turnkey design and builders of high value added industrial space is well positioned to ride this trend. Free Cash Flow to deploy: We are struck by how efficiently Boustead’s earnings converts into actual cash, and since maintenance capex is only about 5% earnings, this leaves plenty room for dividends and making value accreting investments. On a 5 year average, Boustead’s payout ratio has been ~52%, which leaves the remainder of retained cash for new investments, which so far have been: expanding the Industrial Portfolio, OM Holdings, and a stake in a Beijing premium mixed development. Key risks: - Immediate risks are to the Energy business as main

EPC contractors are bidding competitively thus forcing sub-contractors like Boustead to accept lower margins. Thankfully the energy business is only 10% PBT.

- Boustead, on average, retains 50% of free cash to make new value accreting investments, this is a key strength. However, there is also the risk of making a bad value destroying investment, in which case it would have been better to have distributed all free cash to shareholders.

- An outside risk would be an US18.8m contingent liability in the event Boustead is not released from guarantees provided during its Libya project. Common sense dictates that they should be released under “force majeure” due to the civil war.

Business Overview:- Geospatial Technology (~30% PATMI), 12%-13%y-y earnings growth for next 2 decades If you could distribute, and service provide, a technology product, that is:

a. the gold standard in its field (41% global market share, with no.2 competitor a distant 10%)

b. is ubiquitously used by government agencies the world over (61% global share by government),

c. is being scaled up in its usage by such agencies in an increasingly data driven world,

d. is stickable as it forms the common data mapping platform used across agencies and across user interface platforms

e. is licensed to distributors on an exclusive country basis,

you might say that’s an excellent business, with a wide economic moat with which to maintain margins and take market share. But if I told you it can be bought at the price of

less than 10x this FY’s earnings, with earnings growth visibility of 12%-13%y-y for perhaps the next 2 decades, then you might really sit up. The Geospatial division at Boustead operates under such economic moat conditions, and at the current share price of S$1.27, roughly translates to that sort of value. So what is this technology and who makes it? Specifically, it is a Geographic Information System (GIS) made by US firm ESRI Inc., exclusively licensed since 1990, to two 88.2% owned Boustead subsidiaries, Esri Australia and Esri South Asia, for the following 7 countries: Australia, Singapore, Malaysia, Indonesia, Brunei, Timor Leste, and Bangladesh. ESRI Inc. is the global market leader in Geographic Information Systems, and through its exclusive country licensing arrangements with joint ventures globally, it has taken a 41% global market share (and growing) in GIS (61% by public sector). To maintain its technological lead it invests a whopping 20% of revenue into R&D. ESRI was founded in 1969 by Jack Dangermond (ranked #190 Forbes Billionaires) and his wife Laura, to provide land use analysis. It remains a privately held company till today of over 3000 employees. What is a Geographic Information System (GIS)? A GIS is a technology enabled map (mapping software), such that objects on the map are populated by series of quantitative and qualitative data, hence geographical information about where the object is, is linked to descriptive information about the object, and also between object to object and different types of objects. Thus how the objects interact with each other and with the geographical space it is in, can be quantitatively and qualitatively analysed over different dimensions, time frames, and presented graphically. A GIS then is a combination of cartography, database technology, and statistical & logical analysis. By applying a GIS to networks of assets on a map, asset management, planning & analysis, field mobility, operational awareness and stakeholder engagement can be enhanced. An example of why GIS and its multiple applications: An example would be useful: PUB operated 3 networks of piping – water provision, sewerage, and rainwater drainage – across 3 respective departments. With a GIS it was able to: 1. improve asset management of its networks as it overlaid

them with descriptive data 2. improve planning and analysis by viewing assets in

different perspectives (e.g. network against network and network against other layers of roads, buildings, property)

3. improve field mobility as maintenance crews with mobile devices could access the GIS and communicate with command centres in real time

4. improve operational awareness as hotspots could be identified thru analysis of geographical and asset data,

5. improve stakeholder engagement as the 3 departments shared information efficiently on a common platform, could therefore integrate their operating systems, which


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enabled decisions to be more objective (data driven), breaking down silos.

The applications actually extend beyond infrastructure – in fact, anything that can be depicted by data on a map – can be a GIS application, in both the public and private sectors. Common other applications are disease control (think analysis of the numbers of outbreaks, concentration, vectors, and speed of spread), disaster management (ESRI used in the Queensland flood), defense, crime fighting (ESRI used by the Malaysia police), environmental conservation, to commercial uses like location of shops, product distribution, analyzed against population-income geographic distribution and demographics. Distribution, Consulting & Implementation, Training and After Sales Maintenance for a Ubiquitous, Heavily used, and Sticky product: Revenue is charged for (1) distribution per user time basis, (2) consulting & implementation, (3) training, and (4) after sales support. Revenue is therefore recurring, and likely to increase with the scale of use (more consult, more training, more support). From historical trends, revenue and PBT cagr since FY03/08 works out to be 12.4% and 13.3% respectively, with very low volatility (see Fig.1). Latest 9MFY03/13 geospatial PBT has grown +19% current financial year to date. Fig.1 Geospatial – predictable growth, healthy & defensible margins Boustead FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 Geo-Spatial - Revenue 67.8 74.2 74.8 94.7 108.2

- PBT 16.3 21.0 18.7 23.8 26.9- PBT %y-y 28.8% -11.0% 27.3% 13.0%- PBT Margin 24.0% 28.3% 25.0% 25.1% 24.9%

As an example of how much a long time user still drives earnings growth is the Australian government. 10 years ago the Australian government selected ESRI technology to be the backbone of the Australian Spatial Data Infrastructure, the geo-spatial platform which the national government operates on. After 10yrs, till today, 3QFY13 still cites Australia as driving growth. Over the past ten years, almost all of the national government agencies, most provincial government agencies and increasing municipal governments adopt ESRI to fall in line with the Australian Spatial Data Infrastructure, so that systems across the board are connected. Indeed we still have not seen the full extent of growth potential from Singapore, Indonesia and Malaysia out of Boustead’s exclusive markets. Singapore does not have an official Spatial Data Infrastructure yet, but the Singapore Land Authority has taken an unofficial lead in this area. Today, most Singapore government agencies and statutory boards (e.g. PUB, SingPower) already use ESRI. The URA uses ESRI as the platform to undertake the Master Plan for Singapore every 5 years. In other words, ESRI technology is powering the entire development plan for the country.

In 2011, both Malaysia and Indonesia selected ESRI technology as the backbone of their respective Spatial Data Infrastructures. Like the Australia experience, we expect national agencies to be the first to come on board, followed by provincial and then municipal governments. However, although the potential for both countries to scale-up ESRI use is rather inevitable, we think scale of use will actually be gradual, as the key drivers of this technology tend to be the country's level of development (with developed countries utilising geo-spatial technology the most), IT infrastructure, and data gathering capability. Nonetheless, FY12 was a breakthrough year for Indonesia’s adoption of ESRI technology as the Geo-Spatial Information Act was established in April 2011. Boustead is now playing a pivotal role in supporting the Indonesia government put in place the National Spatial Data Infrastructure to be used across ministries and agencies. In Malaysia, Petronas has selected ESRI to support its widespread oil and gas operations, while the government has also selected ESRI as the backbone of its Malaysia Geospatial Data Infrastructure project, also to be implemented across national and state government bodies. Suffices to say, Boustead’s management believes both Indonesia and Malaysia have a lot of potential, but it will take time to educate both markets to the full benefits of the technology. Today, 70-80% of Boustead’s geospatial clients come from the government sector. The corporate sector is beginning to adopt ESRI technology as well if they can gather the data, as this is a data intensive business. We believe Boustead’s Geospatial earnings has 12-13%y-y growth potential for the next 2 decades. In our valuation though we are only forecasting 3 yrs growth and flat thereafter (see later), in any case this leaves room for upgrades in the future if we sense that the market may re-rate Boustead over time as it digests that Geospatial earnings may grow into dominance for the group. Industrial Property D&B plus Portfolio Rentals (~60% PATMI) – well positioned to ride S’pore’s next wave of productivity change. One of the intriguing things to note about Boustead’s industrial property design & build business is that its margins (see Fig.2) are nothing like as compressed as normal contractors (even after stripping out rental income), and neither is its working capital anything like as stretched as normal contractors (see Pg.10). Simply put, it isn’t a normal contractor.


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Fig.2 Not a normal contractor… Boustead FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 Industrial D&B + Rentals 193.3 265.5 183.7 295.7 134.1

- PBT 59.9 58.9 16.8 37.8 29.3- PBT %y-y -1.7% -71.5% 125.0% -22.5%- PBT Margin 31.0% 22.2% 9.1% 12.8% 21.8%

Boustead’s D&B business is a one-stop shop (full turnkey) whereby technologically advanced companies can engage Boustead Projects (BP is 100% owned) to design an industrial facility according to its complex specifications, project manage contractors to build the facility, and hand over the facility back to them on a one-stop shop basis. There are only 2 other known competitors that operate full turnkey design and build – Ascendas and Bovis. Thus Boustead captures the whole value chain from Architecture, Industrial Process Engineering, Structural and Civil Engineering, Construction Project Management, all the way to TOP. Key strength therefore lies in the in-depth domain knowledge having developed over 4m sqm of industrial real estate since 1996, in addition to its superior project management skills to deliver the final product in 15 months. For the construction process, Boustead does not manufacture or fabricate anything, but manages the contractors – this ensures good cash flow, low capex – and allows exportability of the business model overseas as it simply engages local contractors in the country (projects done outside Singapore include China, Malaysia and Vietnam). Critical components are purchased immediately upon clients signing contracts to hedge against future price movements. Clients come from across industry, and have included for example: Abbott, Agility, Applied Materials, BAX, Bell Helicopter, Bombardier Aerospace, Fortis Global Healthcare, Goodrich, Halliburton, Hawker Pacific, IBM, Jabil, P&G, Rolls-Royce, SIAEC’s SAESL, Sandvik, Schenker, SDV logistics, ST Electronics, UPS, to name a few. Design, Build and Lease (DB&L) – building up the Industrial Portfolio for recurring income D&B revenues and profit are progressively booked, however, some clients who prefer to go asset light do not actually want to own a property, preferring to lease instead. In this case, Boustead and the client will beforehand enter into a design, build and lease contract, whereby Boustead will design and build as per normal, but will not book any revenue and profit on the project, instead taking the property onto its balance sheet, from TOP onward it will charge the client rental income. This is one of its strategies to reinvest its strong free cash flows. To date, it has retained 7 properties (75,340 sqm), and will add another 2 more properties (6490 + 20020 sqm) currently under construction, in FY03/14. Outside of DB&L, it is also looking to deploy free cash generated in more industrial properties. Outlook Industrial Property D&B: its about the evolution of space, not the brute addition of space

Singapore’s industrial space continues to evolve as the country attempts to move up the value chain: the 1960s was about labour intensive industries and ready-built standard factories; the 1970s was much like the 1960s except more industries were added especially in petrochemicals; the 1980s saw demand shift for technological and capital intensive space; the 1990s saw the move to augment tech/capital with IT and a strategic shift towards internationalization of industrial operations; the 2000s saw a shift to greater R&D and technology ahead of heavy capital goods; the 2010s will be about the current trends continuing while the principles of land intensification, clustering, and quality work environment come into play as industrial buildings become more work, live play environments. The point of this short history is to outline the fact that Boustead’s orderbook is more about the constant evolution of space and its renewal, rather than the brute addition of new space released by the government. As Singapore’s GDP slows, the secular trend of quality renewal is the name of the game, and this is where Boustead is already a market leader, and is well positioned for the constant evolution of industrial space. Boustead’s D&B orderbook currently stands at S$206m and has averaged S$219m since 2008 with low volatility (see Pg.8). The only year where it dipped below S$200m was 2010 (FY03/11), when there were more D&B and Lease contracts which do not enter the orderbook as explained earlier. For our forecasts, we are using very conservative orderbook projections of S$206m, S$204m, S$202 this FY03/13 till FY03/15 (see forecasts & valuation section later for further discussion). Energy Related Engineering (~10% PATMI) – at the heart of the refining process For the oil & gas sector, Boustead has both a downstream and upstream presence. Downstream business – Only a handful of players in Direct-Fired & Waste Heat Recovery: The downstream presence is led by, mainly UK based, Boustead International Heaters (BIH, 100% owned), which makes up roughly 75% of their energy-related engineering division's revenue. BIH provides direct-fired process heaters and waste heat recovery units to refineries, gas processing plants and petrochemical plants. Both process heaters and waste heat recovery units are available globally through only a handful of suppliers – BIH, Foster Wheeler, Kinetic Technologies and Heurtey Petrochem. Barriers to entry (knowledge, track record) remain high as compared to other industries. Direct-fired process heaters are the huge process units that heat up incoming crude oil and natural gas to temperatures above 700 degrees Celsius, so that the crude oil and natural gas can be broken down into various


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distillates or petroleum products either by physical distillation or by catalysts. Thus, their units are at the heart of the refining process because without the huge amounts of heat input, the distillation process cannot take place. Typically, crude oil and natural gas flows through the tubes of a process heater (where the heat reaction process and boiling points take place) before flowing into distillation columns where they are separated. Waste heat recovery units are process units placed on the back end of refining processes which take waste heat and flue gases, and recycle these back into the heating process so that there is greater energy efficiency (because the process does not require more fuel for heating) and less pollution (since the waste heat and flue gases are not released directly into the environment or flared off like you typically see in refineries). Waste heat recovery units are also utilised upstream on the back end of gas turbine units as waste heat recovery units can recycle the waste gas from the process back to the gas turbine units and increase the efficiency of gas turbine units from 40% efficiency (without waste heat recovery) to 70-80% efficiency (with waste heat recovery). Upstream Business: As for the upstream business Boustead’s 78.8% owned subsidiary, Controls & Electrics, provides process control systems and emergency/safety shutdown process systems. Their systems typically help to control the wellhead and are also utilised on production platforms and FPSOs, where they help to shutdown the production process safely and protect the lives of people, as well as assets. Outlook for Energy Related Engineering – forget Europe’s overcapacity, focus on the US and Asia Fig.3: Flat revenues due to GBP/SGD depreciation, margin compression due to main contractors winning bids at lower prices Boustead FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 Energy - Revenue 137.2 146.5 122.3 140.9 125.7

- PBT 15.9 18.5 19.9 17.0 13.4- PBT %y-y 16.4% 7.6% -14.6% -21.2%- PBT Margin 11.6% 12.6% 16.3% 12.1% 10.7%

From the figure above, revenues for the Energy business has been flat, while margins have declined. Currently, there is global refining overcapacity, and one wonders if that has anything to do with flat revenues. Certainly that has impacted some regions of the world, particularly Europe which historically has been one of the major refining centres. However, refining capacity has been transitioning from ODEC countries to either the sources of the crude (e.g. Middle East, and more recently Australia and the U.S.) or the major end-user consuming nations (e.g. China and South East Asia) where more refineries are either being built or expanding. These emerging places tend to be where BIH contract wins are.

In actual fact, revenue (in SGD) for the Energy-Related Engineering Division over the past five years has been growing slowly, but due to the significant weakening of the GBP/SGD over the last five years, appears flattish. Therefore despite the overcapacity, BIH’s orderbooks have been fairly resilient averaging S$118m since 2008 (currently S$114m), with only one year at S$67m in FY03/11 (see Pg.8). Indeed, BIH has been benefitting from LNG plants and expansions in places such as in Australia, where process heater systems are also used in LNG plants. Witness also the Aug12 S$39m process heater (largest in 6yrs) contract win in the US. In addition, management signals that enquiries for waste heat recovery units are growing, as demand for energy efficiency and environmentally friendliness is a secular trend. Thus we could see an increase in waste-heat recovery going forward. In terms of the global environment at the moment, we believe that investments in oil & gas infrastructure will continue, supported by reasonably good oil prices. For our forecasts, we are using orders above S$100m till FY03/15, flat thereafter (see forecasts & valuation section later for further discussion). Our main concern actually is margin compression, which is unusual given only 4 players globally. The main reason turns out to be not so much competition among the 4, who are operating at the sub-contractor level, but at the main contractor level where competition is rife especially in the Middle East – Korean EPCs have been dominating the contract wins there by bidding aggressively – forcing sub-contractors like BIH to accept lower margins, as such, this FY’s PBT margins are averaging 8.7% as compared to last FY’s 10.7% and 12.1% the year before that. Water Related Engineering (~0% PATMI) – competition is tight here. Established in 1980, Boustead Salcon (100% owned) being a fully integrated engineering, procurement, construction and maintenance contractor is capable of designing, engineering and constructing on a full turnkey basis water and wastewater treatment plants for industrial and municipal applications. This includes the processing of raw water, sea water desalination, ion exchange, ultra-pure water production and NEWater reclamation. It has completed 800 projects in 60 countries, across varied industries such as oil and gas, petrochemicals, pharmaceuticals, power, semicon, and defense. It has the key distinction of being the only Asian specialist outside Japan to be a pre-qualified vendor to several of the world’s largest EPC corporations.


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Fig.4: Water business struggling to make a profit Boustead FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 Water - Revenue 35.9 26.8 54.9 28.7 40.1

- PBT (14.0) (8.4) 7.8 (1.7) 0.1- PBT %y-y -40.0% -192.9% -121.8% -105.9%- PBT Margin -39.0% -31.3% 14.2% -5.9% 0.2%

This division has seen its fair share of downs. Setbacks on 2 Phillippines projects in FY0308; provisions for legacy issues post acquisition in FY03/09 (Boustead Salcon was a progressive acquisition from 2002-2006): amicable termination of its S$114m contract in Libya in FY03/10 due to technical faults with the project’s design by the main consultant; and lastly further provisions having to be made after the civil war in FY03/11. All these have conspired to eat away at the bottom line even when profitable, leaving most years mainly in the red. Last FY03/12 was thankfully, an uneventful year in terms of bad luck. Despite that, the division barely broke even. 9MYTD FY03/13, we have the same story of barely breaking even. Underlying, the water treatment landscape is just highly competitive. We are not projecting profits in our forecasts. Free Cash Flow for new investments (and dividends). On average, 86% of Boustead’s PBT is converted to free cash, its strong track record of cash generation is a testament to its stable of sustainable business models. With this free cash, it is able reward shareholders (dividend payout ratio of 52% 5yr average; share buybacks), as well as utilize the balance for new investment. Major investments have been its industrial portfolio over the last 2 yrs, a S$23.3m 8% stake in ASX-listed OM Holdings (one of the world’s top ten manganese asset developers), and a S$20.1m 4% stake in 402k sqm mixed development in Beijing Tongzhou with the Perrenial Group of companies. Fig.5 Boustead’s track record of free cash generation is ammunition for new value-accreting investments, and returning cash to shareholders. FREE CASH FLOW FY03/08 FY03/09 FY03/10 FY03/11 FY03/12PBT 75.7 81.4 59.0 73.6 71.9Cashflow from ops 82.8 44.8 52.6 52.1 87.1+ Div'd Assoc, JV, Invmt - Div'd to MI (1.7) (6.1) 23.8 0.1 (0.7)Less: CAPEX, net (8.8) (6.2) (2.1) (1.7) (3.7)Free Cash Flow to Firm: 72.3 32.6 74.3 50.5 82.7- New Investments, net (2.7) (1.6) (5.2) (34.9) (61.9)- Dividends + Sharebuyback (17.1) (26.8) (24.2) (30.8) (36.7)- Pay Debt (6.6) 15.8 (5.1) 2.2 (3.1) SWOT ANALYSIS Strengths Market dominance, industry product leader, product

stickiness, exclusive dealership for Geospatial. Market leadership in Industrial Property Design & Build,

one of only 3 known full turnkey players.

Market leadership in Direct Fired Heat Processors and Waste Heat Recovery Systems – 4 players globally including Boustead.

Recurring income growing due to Industrial Portfolio and Geospatial.

Boustead’s immense free-cash generation allows for new value-accreting investments.

Weakness Water business too much competition. Opportunities Geospatial Technology is riding the secular trend of data

driven decision making in the government and private sector.

Industrial Property Design & Build business will ride Singapore’s progressive march up the industrial value added chain.

Process Heaters may find new demand in the US, Australia and the industrializing Asia.

Waste-Heat recovery may find increased demand to make the oil and gas refining process more environmentally friendly.

Threats More players in the design and build space could merge

to become full turnkey. Heat processor business, which operates at the sub-

contractor level, faces margin compression as main contractors bid more aggressively for projects.

Contingent liability of US$18.8m from an advanced payment guarantee and performance guarantee issued through Arab Banking Corporation (ABC) to the Bank of Commerce and Development (BCD), subsequent to its S$300m township JV project in Libya in 2007. Due to the 2011 civil war, the project was abandoned and Boustead is claiming “force majeure” to release itself of the guarantees. Although common sense advises that force majeure will likely be upheld by the courts, one should not take these things for granted.

Forecasts & Valuation For all numbers relating to forecasts please refer to Pg.8, for a table depicting forward looking orderbooks and segmental P&Ls. Earnings & Dividend Forecasts for FY03/13, 03/14 and 03/15:- - Positive on Geospatial’s PBT growth of 12-13% CAGR,

with PBT margins in line with historical averages of around 25%.

- Positive on Industrial Property Design & Build, we are projecting conservative orderbooks of S$206, S$204 and S$202, slightly below the historical average of S$219m. This FY03/13’s revenue will however be extinguishing previous orderbook of about S$246m. For the Industrial Portfolio we project PBT growth from there


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in line with the addition of two new properties under the DB&L scheme. We are not assuming further portfolio additions to leave room for upside surprises. In terms of PBT margins, we expect margins to be in the high teens as rental margins are much higher than D&B margins.

- Positive on the Energy business, with orderbooks projected at S$114m, S$113m and S$112m (slightly below the historical average of S$118m) but using conservative margins of 8.7% as previously discussed. This FY03/13’s revenues will be extinguishing previous orderbook of S$145m.

- Lukewarm on the Water treatment business with no PBT contribution from there.

From these expectations we project segmental revenues and segmental PBTs, to see that combined core profitability from these 4 core operating segments, will rise 30.7%y-y, to S$91.1m this FY03/13f, then S$88.6m for FY03/14f and S$92.7m for FY03/15f. We then adjust for HQ costs, other non-operating gains/losses, and derive reported PBT of S$80.3m this FY03/13f, S$82m for FY03/14f, and S$85.8m for FY03/15f. After final adjustments for taxation, and earnings to minority interests, we get reported PATMI, which for FY03/13f is expected to rise 21.4% to S$67.5m, then S$63.1m for FY03/14f, and S$65.7m for FY03/15f. In EPS and DPS (assuming the 5yr historical average payout of 52%) terms, this represents: Fig.6 EPS and DPS forecasts Boustead FY03/11 FY03/12 FY03/13f FY03/14f FY03/15f EPS 0.103$ 0.110$ 0.135$ 0.126$ 0.131$ DPS 0.070$ 0.050$ 0.070$ 0.066$ 0.069$ To reality check these numbers, 9M FY03/13 for combined core profitability (4 operating segments) is already at S$71.4m (see latest quarterly result) which is 78% of our FY03/13 forecast. For reported PATMI, we see that 9M FY03/13 is already at S$53.7m (79.5% of our forecast). Remember, these are just estimates, the important takeaway is that our projections for this FY and the next 2 years marks a new benchmark expectation of earnings into the over sixty million bracket from the over fifty million bracket. In essence, it represents the leadership Boustead has established in Industrial D&B, and the powerful economic moat it enjoys for Geospatial. Valuation: Discounted Cash Flow to Equity yields Fair Value of S$1.80.

Even if other core-businesses stay flat, earnings by 2016 should reach the over seventy million range, powered by Geospatial. But we do not even factor this likely upside into our valuation. In fact our discounted cash flow to equity valuation uses terminal growth as 0% after FY03/15, a highly unlikely event given Geospatial’s lack of competition and progressive scale of use by governments. Thus our valuation model is driven by the earnings projections mentioned from FY03/13-FY03/15, the free cash projections that follow from that (see Fig.7), followed by 0% terminal growth thereafter. Fig.7 Free Cash Forecasts FREE CASH FLOW FY03/13f FY03/14f FY03/15fPBT 80.3 82.0 85.8Cashflow from ops 42.5 61.0 73.9+ Div'd Assoc, JV, Invmt - Div'd to MI (0.9) (0.9) (1.1)Less: CAPEX, net (5.1) (4.7) (4.7)Free Cash Flow to Firm: 36.5 55.4 68.0 Indeed we feel there are more upside risks to our valuation than downside risks. So, along with the standard valuation parameters of:

- Risk Free Rate: 3% - Required Return on Equity: 9% - Boustead’s Beta: 1.0 - WACC: 8.8% - Terminal Growth: 0%

Boustead’s fair valuation derived is $1.80. Which indicates that Boustead is trading at 13.4x p/e and 3.9% yield based on FY03/13f EPS and DPS (Fig.8). Fig.7 Valuations based on last price of S$1.27 and FV of S$1.80 Boustead FY03/11 FY03/12 FY03/13f FY03/14f FY03/15fP/E, (X) - last price 12.3 11.5 9.4 10.1 9.7Dividend Yield (%) - last price 5.5% 3.9% 5.5% 5.2% 5.4%P/E (X) - fair value 13.4 14.3 13.8Dividend Yield (%) - fair value 3.9% 3.7% 3.8% At current price of S$1.27, Boustead is trading at 11.5x p/e, 3.9% yield, last FY’s EPS and DPS, versus 9.4x p/e, 5.5% yield on FY03/13f EPS and DPS. This is a bargain valuation, we feel, given the strength of the business models involved – a powerful economic moat in Geospatial, market leadership for Industrial D&B, market leadership in process heaters & waste heat recovery, and tremendous free cash generation. Simply put, we think it’s a BUY.


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Boustead Orderbook, Segmentals (S$m) FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13e FY03/14e FY03/15eOrderbook forecasts =>

Energy Related 117 123 143 67 145 114 113 112 Water 46 23 20 37 5 20 20 20 Real Est. - D&B only 287 221 214 142 246 206 204 202

Total Orderbook (S$ millions) 294 367 377 246 397 340 337 333 Design, Build & Leaseback 55 38

- - Segmental P&L (S$m)Energy - Revenue 137.2 146.5 122.3 140.9 125.7 122 95.8 94.9

- PBT 15.9 18.5 19.9 17.0 13.4 10.6 8.3 8.2 - PBT %y-y 16.4% 7.6% -14.6% -21.2% -21.0% -21.4% -1.0%- PBT Margin 11.6% 12.6% 16.3% 12.1% 10.7% 8.7% 8.7% 8.7%

Water - Revenue 35.9 26.8 54.9 28.7 40.1 21.3 16.7 16.6

- PBT (14.0) (8.4) 7.8 (1.7) 0.1 0.1 0.0 0.0 - PBT %y-y -40.0% -192.9% -121.8% -105.9% -46.8% -21.5% -1.0%- PBT Margin -39.0% -31.3% 14.2% -5.9% 0.2% 0.2% 0.2% 0.2%

Industrial D&B + Rentals 193.3 265.5 183.7 295.7 134.1 264.8 228.6 226.9 - PBT 59.9 58.9 16.8 37.8 29.3 49.3 45.2 45.1 - PBT %y-y -1.7% -71.5% 125.0% -22.5% 68.2% -8.3% -0.2%- PBT Margin 31.0% 22.2% 9.1% 12.8% 21.8% 18.6% 19.8% 19.9%

Geo-Spatial - Revenue 67.8 74.2 74.8 94.7 108.2 121.6 136.7 153.6 - PBT 16.3 21.0 18.7 23.8 26.9 31.2 35.0 39.4 - PBT %y-y 28.8% -11.0% 27.3% 13.0% 15.8% 12.4% 12.4%

- PBT Margin 24.0% 28.3% 25.0% 25.1% 24.9% 25.6% 25.6% 25.6%Total Revenue 434.2 513.0 435.7 560.0 408.1 529.6 477.9 492.0

- PBT, segmentals 78.1 90.0 63.2 76.9 69.7 91.1 88.6 92.7- PBT %y-y, segmentals 15.2% -29.8% 21.7% -9.4% 30.7% -2.7% 4.7%- PBT Margin, segmentals 18.0% 17.5% 14.5% 13.7% 17.1% 17.2% 18.5% 18.8%- Hd Office Costs, non-seg. gains/(loss) (2.4) (8.6) (4.2) (3.3) 2.2 (10.8) (6.6) (6.9)- PBT reported 75.7 81.4 59.0 73.6 71.9 80.3 82.0 85.8- PBT reported, %y-y 7.5% -27.6% 24.8% -2.2% 11.7% 2.1% 4.7%- PBT reported, margin 15.9% 13.5% 13.1% 17.6% 15.2% 17.2% 17.4%

Revenue (% total)Energy Related 31.6% 28.6% 28.1% 25.2% 30.8% 23.0% 20.1% 19.3%Water 8.3% 5.2% 12.6% 5.1% 9.8% 4.0% 3.5% 3.4%Real Est - D&B, Leasing 44.5% 51.8% 42.2% 52.8% 32.9% 50.0% 47.8% 46.1%Geo-Spatial 15.6% 14.5% 17.2% 16.9% 26.5% 23.0% 28.6% 31.2%

PBT (% total)Energy Related 20.4% 20.6% 31.5% 22.1% 19.2% 11.6% 9.4% 8.9%Water -17.9% -9.3% 12.3% -2.2% 0.1% 0.1% 0.0% 0.0%Real Est - D&B, Leasing 76.7% 65.4% 26.6% 49.2% 42.0% 54.1% 51.0% 48.6%

- D&B 72.3% 61.0% 19.6% 43.2% 31.0% 46.2% 39.8% 37.7%- Portfolio 4.4% 4.5% 7.0% 6.0% 11.0% 7.9% 11.2% 11.0%

Geo-Spatial 20.9% 23.3% 29.6% 30.9% 38.6% 34.2% 39.5% 42.4%Recurring PBT (non-orderbook):

Geospatial + Ind. Portfolio (% PBT) 25.3% 27.8% 36.6% 36.9% 49.6% 42.1% 50.7% 53.4%Geospatial + Ind. Portfolio PBT growth 26.8% -7.6% 22.9% 21.8% 10.7% 17.3% 10.2%


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FYE March FY03/11 FY03/12 FY03/13f FY03/14f FY03/15fValuation RatiosP/E (X) 12.3 11.5 9.4 10.1 9.7 P/E (X), adj. 12.5 15.0 9.6 10.1 9.7 P/B (X) 2.8 2.5 2.3 2.0 1.9 EV/EBITDA (X), adj. 5.0 7.6 5.7 5.7 5.4 Dividend Yield (%) 5.5% 3.9% 5.5% 5.2% 5.4%Per share data (SGD)EPS, reported 0.103 0.110 0.135 0.126 0.131EPS, adj. 0.101 0.085 0.132 0.126 0.131DPS 0.070 0.050 0.070 0.066 0.069BVPS 0.45 0.50 0.56 0.62 0.69Growth & Margins (%)GrowthRevenue 27.9% -27.1% 29.6% -9.8% 3.0%EBITDA 60.6% -33.8% 31.8% 1.1% 4.6%EBIT 62.9% -35.8% 31.4% 4.1% 4.5%Net Income, adj. 21.3% 6.4% 21.4% -6.5% 4.1%MarginsEBITDA margin 16.9% 15.3% 15.6% 17.5% 17.7%EBIT margin 16.2% 14.3% 14.5% 16.7% 17.0%Net Profit Margin 10.4% 14.3% 13.3% 13.9% 14.1%Key RatiosROE (%) 22.8% 23.0% 25.1% 21.2% 20.0%ROA (%) 10.7% 10.5% 11.5% 10.4% 10.4%Net Debt (Cash) (184.6) (170.5) (159.0) (181.4) (215.0)Net Debt / Equity Net Cash Net Cash Net Cash Net Cash Net CashDebt / Equity 11% 8% 14% 13% 12%Income Statement (SGD mn)Revenue 560.6 408.7 529.6 477.9 492.0EBITDA 94.5 62.6 82.5 83.4 87.2Depreciation & Amortisation (3.6) (4.1) (5.7) (3.4) (3.7)EBIT 91.0 58.4 76.8 80.0 83.5Net Fin. & Invmt (Expense)/Income 2.1 3.0 2.3 2.1 2.3Operating PBT 93.0 61.5 79.1 82.0 85.8Other gains/losses (19.3) 0.2 0.0 0.0 0.0Investment gains/losses 1.0 12.7 1.2 0.0 0.0Associates & JVs (1.1) (2.4) 0.0 0.0 0.0Profit Before Tax 73.6 71.9 80.3 82.0 85.8Taxation (15.0) (13.5) (10.0) (15.7) (16.4)Profit After Tax 58.6 58.4 70.3 66.4 69.4Non-controlling Interest (6.3) (2.8) (2.8) (3.3) (3.8)PATMI 52.2 55.6 67.5 63.1 65.7Source: PSR


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FYE March FY03/11 FY03/12 FY03/13f FY03/14f FY03/15fBalance Sheet (SGD mn)PPE 15.8 17.2 16.6 17.9 18.9Intangibles 3.4 3.3 3.3 3.3 3.3Associates & JVs 5.2 2.8 2.8 2.8 2.8Investments 69.1 113.5 133.5 133.5 133.5Others 2.9 3.5 3.5 3.5 3.5Total non-current assets 96.4 140.3 159.7 161.0 162.0Inventories 50.6 62.1 60.6 53.5 54.9Accounts Receivables 112.7 116.2 127.4 115.0 118.4Investments 16.8 56.7 56.7 56.7 56.7Cash 209.8 192.5 201.2 223.5 257.2Others 0.0 0.0 0.0 0.0 0.0Total current assets 389.9 427.5 445.9 448.7 487.1Total Assets 486.3 567.8 605.6 609.7 649.1Short term loans 3.5 4.3 6.9 6.9 6.9Accounts Payables 197.8 253.3 240.6 212.2 217.8Others 21.7 23.6 23.6 23.6 23.6Total current liabilities 223.0 281.2 271.0 242.7 248.2Long term loans 21.6 17.7 35.3 35.3 35.3Others 4.2 4.6 4.6 4.6 4.6Total non-current liabilities 25.8 22.3 39.9 39.9 39.9Non-controlling interest 8.1 9.9 11.8 14.1 16.8Shareholder's Equity 229.4 254.5 282.9 313.0 344.3

Cashflow Statements (SGD mn)CFOPBT 73.6 71.9 80.3 82.0 85.8Adjustments 21.0 (9.4) (7.7) 1.4 1.4Cash from ops before WC changes 94.5 62.6 72.7 83.4 87.2WC changes (28.0) 33.9 (22.5) (8.7) 0.7Cash generated from ops 66.5 96.5 50.2 74.6 88.0Taxes, net (16.5) (12.4) (10.0) (15.7) (16.4)Interest, net 2.1 3.0 2.3 2.1 2.3Cashflow from ops 52.1 87.1 42.5 61.0 73.9CFICAPEX, net (1.7) (3.7) (5.1) (4.7) (4.7)Div'd from Assoc & JVs, less Div'd to MI 0.1 (0.7) (0.9) (0.9) (1.1)Dividends/Interest from Investments 0.0 0.0 0.0 0.0 0.0Purchase/sale of investments (34.9) (61.9) (9.0) 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0Cashflow from investments (36.5) (66.4) (14.9) (5.6) (5.9)CFFShare issuance 0.7 0.1 0.1 0.0 0.0Purchase of treasury shares (0.4) (1.3) (3.8) 0.0 0.0Loans, net of repayments 2.2 (3.1) 20.2 0.0 0.0Dividends to shareholders & capital reduction (30.4) (35.4) (35.3) (33.0) (34.4)Others 0.0 0.0 0.0 0.0 0.0Cashflow from financing (28.0) (39.8) (18.9) (33.0) (34.4)Net change in cash (12.4) (19.0) 8.7 22.4 33.6Effects of exchange rates (0.2) 1.7 0.0 0.0 0.0CCE, end 209.8 192.5 201.2 223.5 257.2Source: PSR


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Total Returns Recommendation Rating> +20% Buy 1+5% to +20% Accumulate 2-5% to +5% Neutral 3-5% to -20% Reduce 4<-20% Sell 5

We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation

Ratings History

PSR Rating System

Remarks

12345

0.750.850.951.051.151.251.351.451.551.651.751.85

Dec-10

Jan-11Feb-11M

ar-11Apr-11M

ay-11Jun-11Jul-11Aug-11Sep-11O

ct-11N

ov-11D

ec-11Jan-12Feb-12M

ar-12Apr-12M

ay-12Jun-12Jul-12Aug-12Sep-12O

ct-12N

ov-12D

ec-12Jan-13Feb-13M

ar-13Apr-13M

ay-13Jun-13

Source: Bloomberg, PSR

Market PriceTarget Price


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Important Information This publication is prepared by Phillip Securities Research Pte Ltd., 250 North Bridge Road, #06-00, Raffles City Tower, Singapore 179101 (Registration Number: 198803136N), which is regulated by the Monetary Authority of Singapore (“Phillip Securities Research”). By receiving or reading this publication, you agree to be bound by the terms and limitations set out below. This publication has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this document by mistake, please delete or destroy it, and notify the sender immediately. Phillip Securities Research shall not be liable for any direct or consequential loss arising from any use of material contained in this publication. 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preparation or issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this publication. Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment. To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold a interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this publication. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, which is not reflected in this material, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the preparation or issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this material. The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction. Section 27 of the Financial Advisers Act (Cap. 110) of Singapore and the MAS Notice on Recommendations on Investment Products (FAA-N01) do not apply in respect of this publication. This material is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this material may not be suitable for all investors and a person receiving or reading this material should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products. Please contact Phillip Securities Research at [65 65311240] in respect of any matters arising from, or in connection with, this document. This report is only for the purpose of distribution in Singapore.


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Contact Information (Singapore Research Team)

Chan Wai Chee Joshua Tan Derrick Heng CEO, Research Head of Research Deputy Head of Research

Special Opportunities Global Macro, Asset Strategy SG Equity Strategist & Transport

+65 6531 1231 +65 6531 1249 +65 6531 1221 [email protected] [email protected] [email protected]

Go Choon Koay, Bryan Travis Seah Ken Ang

Investment Analyst Investment Analyst Investment Analyst Property REITs Financials, Telecoms


Ng Weiwen Roy Chen Nicholas Ong

Macro Analyst Macro Analyst Investment Analyst Global Macro, Asset Strategy Global Macro, Asset Strategy Commodities, Offshore & Marine


Research Assistant

General Enquiries +65 6531 1240 (Phone) [email protected]

mailto:[email protected]

mailto:[email protected]


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Contact Information (Regional Member Companies)

SINGAPORE

Phillip Securities Pte Ltd Raffles City Tower

250, North Bridge Road #06-00 Singapore 179101

Tel : (65) 6533 6001 Fax : (65) 6535 6631

Website: www.poems.com.sg

MALAYSIA

Phillip Capital Management Sdn Bhd B-3-6 Block B Level 3 Megan Avenue II, No. 12, Jalan Yap Kwan Seng, 50450

Kuala Lumpur Tel (603) 21628841 Fax (603) 21665099

Website: www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

Exchange Participant of the Stock Exchange of Hong Kong 11/F United Centre 95 Queensway

Hong Kong Tel (852) 22776600 Fax (852) 28685307

Websites: www.phillip.com.hk

JAPAN

PhillipCapital Japan K.K. 4-2 Nihonbashi Kabuto-cho Chuo-ku

Tokyo 103-0026 Tel (81-3) 3666-2101 Fax (81-3) 3666-6090

Website:www.phillip.co.jp

INDONESIA

PT Phillip Securities Indonesia ANZ Tower Level 23B,

Jl Jend Sudirman Kav 33A Jakarta 10220 – Indonesia

Tel (62-21) 57900800 Fax (62-21) 57900809

Website: www.phillip.co.id

CHINA

Phillip Financial Advisory (Shanghai) Co. Ltd No 550 Yan An East Road,

Ocean Tower Unit 2318, Postal code 200001

Tel (86-21) 51699200 Fax (86-21) 63512940

Website: www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak,

Bangkok 10500 Thailand Tel (66-2) 6351700 / 22680999

Fax (66-2) 22680921 Website www.phillip.co.th

FRANCE

King & Shaxson Capital Limited 3rd Floor, 35 Rue de la Bienfaisance 75008

Paris France Tel (33-1) 45633100 Fax (33-1) 45636017

Website: www.kingandshaxson.com

UNITED KINGDOM

King & Shaxson Capital Limited 6th Floor, Candlewick House,

120 Cannon Street, London, EC4N 6AS

Tel (44-20) 7426 5950 Fax (44-20) 7626 1757

Website: www.kingandshaxson.com

UNITED STATES

Phillip Futures Inc 141 W Jackson Blvd Ste 3050

The Chicago Board of Trade Building Chicago, IL 60604 USA

Tel +1.312.356.9000 Fax +1.312.356.9005

AUSTRALIA

PhillipCapital Level 37, 530 Collins Street,

Melbourne, Victoria 3000, Australia Tel (613) 96298380 Fax (613) 96148309

Website: www.phillipcapital.com.au

http://www.poems.com.sg/

http://www.poems.com.my/

http://www.phillip.com.hk/

http://www.phillip.co.id/

http://www.phillip.co.th/

http://www.kingandshaxson.com/

http://www.kingandshaxson.com/

http://www.phillipcapital.com.au/

Boustead Singapore Ltd

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