Boustead Singapore

[mrEngineer]

A DBL concept is similar to BOT concept where companies tries to separately seek financing by playing around with company structures and ultimately not impacting the balance sheet with too much construction or project loans. However for the case of Boustead, the balance sheet is way too strong (thus most of their subsi are more than 51% and fully consolidated) and probably not easier to be impacted by its debt covenants and thus not an issue for it. On the other hand, it also shows that Boustead has to keep a significant amount of cash in order to give trust to shareholders and debt holders. This means that the company would not be able to grow as much as EPC or asset light firms.

The real potential or catalyst for Boustead may be the possibility to unlock its DBL properties in next 3-5 years time by making them into REITs or separately finance them. Then they would earn a pile. However, nobody knows whether REIT time bomb will go off by that period of time.

Even if one wants to look at the DBL projects as a good recurring income with stable cashflows, one should not ignore the same old real estate assumption that rental demand is always stable and available. Maybe, one should even go down to scrutinize the details of the industrial DBL agreements/contracts with these big firms to understand any forms of liabilities. Like for e.g. if one of the aviation companies decide not to continue renting the haagars from Boustead are there convenants to protect them and evaluate the reason and potential for these aviation companies on setting up their business here. All this work makes the investment slightly more complicated and more to think about.

[wee]

Pardon me but i am still not very sure if I understood your reply [I am slow ]

My concern is not whether the properties will be financed by debt, or whether there will be cashflow impact. Neither am i concerned if they can fund the assets with their businesses, or whether they have the right business divisions to do it.

It is whether, when we are computing the $320m asset value (200m cash + 120m properties), are we counting the value of assets that was not yet incurred. If so, how much of the 120m is already in the books?

Hi wee,

From my understanding, probably more loans (long and short-term) would be taken up to finance the costs of construction based on a progress payment basis (i.e. loans are progressively drawn down as and when Boustead is required to pay the contractors). But the amounts for the loans is not expected to be very much more than current (my personal opinion) as cash outflow would slow down as more and more of their properties near completion. Therefore, the completed properties can then be leased out and contribute operating cash flow to finance those still currently under construction.

At the same time, the other 2 major divisions (Energy-Related Engineering and Geo-Spatial) are also good cash generators, judging from FF Wong's conservative stance on the use of capital. Therefore, cash should continue to build up in the kitty, barring major unforseen circumstances.

Regards.

[Musicwhiz]

It is whether, when we are computing the $320m asset value (200m cash + 120m properties), are we counting the value of assets that was not yet incurred. If so, how much of the 120m is already in the books?

I would think a portion of the $120m is already capitalized under development properties.

Will wait for the 1H FY 2012 Balance Sheet to confirm this again, so please bear with me for the moment.

Thanks.

[Contrarian]

Even if one wants to look at the DBL projects as a good recurring income with stable cashflows, one should not ignore the same old real estate assumption that rental demand is always stable and available. Maybe, one should even go down to scrutinize the details of the industrial DBL agreements/contracts with these big firms to understand any forms of liabilities. Like for e.g. if one of the aviation companies decide not to continue renting the haagars from Boustead are there convenants to protect them and evaluate the reason and potential for these aviation companies on setting up their business here. All this work makes the investment slightly more complicated and more to think about.

I believe Boustead projects are built for the clients who intend to lease them for 10-20 years. The facilities are designed for these MNCs and maybe quite different from the normal industrial properties. Unless the clients pull out, it may not be so easy for them to find ready-made alternatives. This is a point worth checking out...

[Musicwhiz]

The real potential or catalyst for Boustead may be the possibility to unlock its DBL properties in next 3-5 years time by making them into REITs or separately finance them. Then they would earn a pile. However, nobody knows whether REIT time bomb will go off by that period of time.

Even if one wants to look at the DBL projects as a good recurring income with stable cashflows, one should not ignore the same old real estate assumption that rental demand is always stable and available. Maybe, one should even go down to scrutinize the details of the industrial DBL agreements/contracts with these big firms to understand any forms of liabilities. Like for e.g. if one of the aviation companies decide not to continue renting the haagars from Boustead are there convenants to protect them and evaluate the reason and potential for these aviation companies on setting up their business here. All this work makes the investment slightly more complicated and more to think about.

I would think that REITs are a type of investment vehicle which is here to stay, unlike shipping trusts which have proven to be volatile and unreliable when ship values plunge. Therefore, barring a major crash in the REIT market, I feel that Boustead's properties would still enjoy healthy underlying demand should Boustead feel the need to divest them.

Your comment is worth considering regarding the clauses within the contracts signed for DB&L but I personally feel it's an aspect which may be too "operational" for a shareholder to scrutinize. Most contracts have standard clauses and since these assets (properties) are highly specialized as Boustead Projects is a niche developer, I would not worry too much about the MNCs dumping their property in search of another. It's not so easy to just switch manufacturing or service plants and it will be highly disruptive to the Company in question.

I believe Boustead projects are built for the clients who intend to lease them for 10-20 years. The facilities are designed for these MNCs and maybe quite different from the normal industrial properties. Unless the clients pull out, it may not be so easy for them to find ready-made alternatives. This is a point worth checking out...

Agree with you Contrarian. If you look at the announced DB&L projects, they are almost always for specialized facilities for major MNCs and therefore I believe a certain portion of the facility/building would be customized for their requirements. These MNCs intend to build up a long-lasting presence in Singapore and Asia-Pac and therefore I do not think they will pull out easily. First, they may suffer a loss of reputation (being viewed as shallow or indecisive), and secondly, they would have a huge sunk cost in giving up a good facility over there.

Alternatives are not so easy to come by if the switching costs are high, which in this instance would be the case as these are specialized industries like aerospace, biotech and logistics which Boustead Projects is catering to.

[wee]

Thanks. I will also be looking out for it.

It is whether, when we are computing the $320m asset value (200m cash + 120m properties), are we counting the value of assets that was not yet incurred. If so, how much of the 120m is already in the books?

I would think a portion of the $120m is already capitalized under development properties.

Will wait for the 1H FY 2012 Balance Sheet to confirm this again, so please bear with me for the moment.

Thanks.

[Contrarian]

A DBL concept is similar to BOT concept where companies tries to separately seek financing by playing around with company structures and ultimately not impacting the balance sheet with too much construction or project loans. However for the case of Boustead, the balance sheet is way too strong (thus most of their subsi are more than 51% and fully consolidated) and probably not easier to be impacted by its debt covenants and thus not an issue for it.

>> On the other hand, it also shows that Boustead has to keep a significant amount of cash in order to
>> give trust to shareholders and debt holders.

MZ, this point is worth checking. SIA has $7bn worth of cash. About half of company value. Also for similar reasons, i heard from a friend.

1. What are the debt conditions given to them by the banks for construction of projects?

2. What are the off-balance sheet items not recorded here?

[Musicwhiz]

MZ, this point is worth checking. SIA has $7bn worth of cash. About half of company value. Also for similar reasons, i heard from a friend.

1. What are the debt conditions given to them by the banks for construction of projects?

2. What are the off-balance sheet items not recorded here?

OK, agree with you that No. 1 is worth checking, but then again I can probably only ask casually as the terms are probably confidential.

As for No. 2, I do not think there are off Balance Sheet items. For companies like Ezra and Swiber who do sale and leaseback, understandably there are off-balance sheet liabilities. But for Boustead Projects undertaking a construction project, there are only liabilities in terms of progress payments to contractors. These will be capitalized accordingly in the books as they crystallize.

My 2-cents. Thanks.

[mrEngineer]

Your comment is worth considering regarding the clauses within the contracts signed for DB&L but I personally feel it's an aspect which may be too "operational" for a shareholder to scrutinize. Most contracts have standard clauses and since these assets (properties) are highly specialized as Boustead Projects is a niche developer, I would not worry too much about the MNCs dumping their property in search of another. It's not so easy to just switch manufacturing or service plants and it will be highly disruptive to the Company in question.

I have seen many contracts that favours the lesee in such arrangements not as an investor but in my workplace (in high capex industry). Thus, thats why I am skeptical.

Honestly, I was scrutinzing San Teh SPA and even CRC rationale to purchase after I saw how business are conducted in my field of work.

Thanks for your +1 anyway. It was just random thoughts after I divested. Still learning lots from you guys.

[Musicwhiz]

Business Times - 02 Nov 2011

Boustead unit clinches $57m contract

Boustead Projects to build integrated facility for ST Electronics unit

By MICHELLE TAN

A SUBSIDIARY of Boustead Singapore has bagged a $57 million contract to design and build a facility for ST Electronics (Info-Software Systems) Pte Ltd.

A specialist in industrial real estate solutions, Boustead Projects is to construct a seven-storey integrated facility comprising manufacturing, technology and office functions at Ang Mo Kio Industrial Park for the unit of ST Electronics, the electronics arm of ST Engineering.

Slated to be ready in the first half of 2013, the new building will add 50,000 square metres of space to ST Electronics' existing facilities in Ang Mo Kio and also serve to consolidate the group's staff in a single location as opposed to being located in several rented premises across the island.

In addition, the new building has been earmarked to be Green Mark Gold certified. As such, several intelligent systems and a number of energy saving solutions will be installed in the facility.

Boustead Projects managing director Thomas Chu said: 'We will work towards delivering a world-class facility to ST Electronics that integrates their various business functions into a single centre of excellence.'

This latest contract win extends the group's three-month winning streak. Boustead Projects has secured projects totalling $90 million from names such as Greenpac, Kerry Logistics, Shinko Plantech and a Fortune 100 transnational healthcare and pharmaceutical corporation.

Cumulatively, since the onset of financial year 2012, Boustead Projects has garnered more than $173 million in new contracts and the group's order book currently hovers around $380 million.

Yesterday, the stock closed 1.5 cents or 1.8 per cent lower at 81 cents.