Boustead Singapore

[Musicwhiz]

Business Times - 26 Feb 2011

Boustead evacuates non-Libyan staff

By VEN SREENIVASAN

BOUSTEAD Singapore has evacuated all its 31 non-Libyan employees from the North African country. 'As previously announced, nine Boustead staff arrived safely back in Singapore, Malaysia and the Philippines on Feb 21,' the company said yesterday.

'Following that, the company made every effort to secure the safe return of the remaining 22 Boustead staff. Under very chaotic and difficult circumstances in Libya, the company, working closely with International SOS, managed to get its remaining Boustead staff onto one of an extremely limited number of flights out of the country on Feb 23.'

The remaining Boustead employees are due to arrive back in their respective home countries including Singapore, Malaysia, Indonesia, Thailand and the Philippines over the next 24 hours, it added.

The employees were working on Boustead's joint venture Al Marj township project in Libya. Boustead recently scaled down its equity stake in the project to 35 per cent and wrote down $1.1 million. The biggest stakeholder is now the Libyan government.

Chairman and group CEO Wong Fong Fui said that he was 'exceptionally glad and relieved' at the evacuation of his employees from Libya.

'There were some tense moments in the chaos of Tripoli over the past week, both in the city and with the closure of the airport over a couple of days, resulting in the halt of almost all commercial flights,' he said. 'During this period, we were in constant contact with our staff, their families, the various foreign ministries including the Ministry of Foreign Affairs in both Singapore and Malaysia, as well as International SOS and the commercial airlines. We spared no effort and used every measure available, and are glad to safely return our staff to their families and allow them to recuperate after their traumatic experience.'

Mr Wong also thanked all parties that had assisted in the evacuation.

'The Ministry of Foreign Affairs in both Singapore and Malaysia provided invaluable advice and support throughout the process. We would also like to thank International SOS who came through at the most critical of moments, as well as all commercial airlines for assisting.'

Boustead said that it was unable to ascertain for now, to what extent, if any, the completion of the township project would be affected by the turmoil in the country.

[mikh]

Boustead announced during lunch that all Boustead staff have been safely evacuated. I am glad to hear this, as it shows the Company has a heart for their employees' safety and have taken all measures to ensure International SOS ferried them home, even though conditions were tough.

The company seems to acted more swiftly and robustly than others. Signs of good management.

[lonewolf]

FINANCIAL EXPOSURE IN LIBYA

Summary

1) At the present time, the Company’s Management has determined that the financial exposure of the Company to all its projects in Libya is between $15.5 million and S$39.6 million. This range takes into account all receivables and loans due from the Libyan joint venture (“JV”) company and its clients, all contingent liabilities and cash balances in Libyan bank accounts (“Bank Balances”).

2) If the Company treats Bank Balances as recoverable, the maximum exposure would be reduced by a further S$2.4 million.

3) Notwithstanding the potential exposure, the Company will continue to be profitable in the current financial year and maintain a strong balance sheet given the strong performance in all its other businesses. Since the beginning of 2011, the Company has been awarded a variety of projects totaling S$55 million and its order book now stands at S$246 million. The Company is also expected to maintain its normal dividend payouts
as compared to the last financial year.

[freedom]

drop to 80 cents, pls.

can collect some.

[mrEngineer]

This works out to be around only 3 to 8 cent per share.. The next funny thing is that the libya project has not been booking in returns for quite some time already. Its just a balance sheet item..

Seriously, if you have the cash, it is a fantastic time to load up this stock fallen off almost 20 cent since early feb. Over, oversold imo..

[piggo]

but the share price went up much more in anticipation of the future possible earnings that a JV in Libya would bring... now, instead of bringing in higher profits the JV might actually incur a 3 - 8c loss; think the sell down still have some way to go.

[Musicwhiz]

Thanks for all the comments and also the summarized info which Boustead has posted up on SGXNet regarding their exposure in Libya.

As a shareholder, of course I am disappointed to hear of their exposure being rather significant; but at the same time, I am also glad that the Company has been swift and transparent enough to disclose this in a timely and detailed manner. At least they provided numbers and possible scenarios and explained what could happen and what they plan to do to mitigate the damage. At the very least, I appreciate the candour in which this was handled and I am happy that the Company has clarified these facts.

From what I can deduce, the announcement mentioned contingent liabilities and also hinted at uncollectible receivables. All these consist of (to me) Balance Sheet items and if there is a case where liabilities arise or debts become bad, then it would be written-off immediately to Income Statement which would take a (rather) severe hit of up to S$39 million (maximum). The Force Majeure Clause may mean that Boustead can claw back some of the losses in subsequent periods, meaning a possible future write-back of expenses and some cash recovered. But as a shareholder and prudent investor, I have to assume the worst case scenario whereby the Company has to completely write-off its investment in Libya with no recourse.

To add to the above, it would imply that there is no cash flow impact currently as cash was not expected to be collected from the Al Marj Township project anyway until completion, and the restructuring was only done and announced on February 1, 2011. To this end, I believe that even though the Group will suffer quite a bad hit from this unexpected episode, their ability to pay dividends should not be affected as all their other divisions are performing well. Hence, the impact should be confined to a one-off reduction in EPS and also possibly some impairment to NAV as a result of the write-off(s).

Moving forward, I guess FF Wong would have learnt a very valuable lesson from this whole fiasco, from the time he took on the project and experienced teething problems during discussions with the designers, as well as problems in collecting cash from the client, disagreements on the specifications for the Township, frequent delays and finally, the ultimate political unrest and violence which is rendering the Project uncompleted (at this point in time). It goes to show that operating in politically volatile and "unpopular" countries may mean that you have a distinct advantage and "monopoly", but it also comes with its associated risks and dangers. This is all part and parcel of doing business and though I am disappointed at the way things have turned out in Libya, I have to stoically accept that things cannot always go smoothly even with a very well-managed company. This is why, I guess, I demand a margin of safety in the event such events occur.

[mrEngineer]

but the share price went up much more in anticipation of the future possible earnings that a JV in Libya would bring... now, instead of bringing in higher profits the JV might actually incur a 3 - 8c loss; think the sell down still have some way to go.

Ok let me go down to the details then...

first of all, boustead has already recognise $40m of revenue and the total project is estimated to bring $240m. Now if we see the provision mentioned, it does not mean boustead will incur a loss but more of a reversal of the $40m revenue that was recognised.

you are right to say that the project halt leads to loss in projected earnings. lets look at the numbers. Using MW PBT margin of approx 20% for real estate solutions (18% in actual), we are talking about $50m reduction in profits. So this translates to less than 10cent per share.. So is a fall of 20cent an overreaction?

---

I missed out a point on the cost. In the very worst case scenario, Boustead has to pay for ALL the cost incurred for the project without getting a single cent. This is how it works:

using percentage of completion of work as revenue recognition method,
40m/240m = 17% of work done and cost incurred.
Assuming 20% given some pre-purchase given to suppliers,
Gross Margin assume to be 30%, so project cost about 170m
Cost incurred that is not recoverrable = 170*0.2 = $34m
This works out to be around 7cents

So worst case scenerio is 17cent loss. Now fall of 20cent is it still overreaction?

[mightyreds]

I think the share price is a reflection of the future growth prospects of a company. Doesn't mean that the company will see a loss of 10% in earnings means the share price will drop 10%. It's the loss of future prospects in the country/region that compounds the matter. Given that there is so much uncertainty in the north african/middle east region, it's only fair to say that companies having exposure in that region will be affected i.e hyflux, boustead. And it's not only the loss of current investments that will affect the share price, but rather the loss of growth factor in those markets. Hence we see a drop in 20% of boustead share price. And if the turmoil continues, I expect to see the share price tumbling further.

[mrEngineer]

I disagree about discounting the growth factors in the country as we dont even have visibility of the next year, much less to say 3, 5, 10 years down the road.. That is also why the power of compounding allows NPV to approximate the next few years of earnings as compared to eternity. Stock price and earnings are different due to the growth factor which are the multiples one is paying for anyway.

Valuation is science. Perception to valuation is an art.