Saturday, November 28, 2009

Boustead Holdings Berhad - Under Appreciated Conglomerate

Historically conglomerate generate poor returns due to lack of focus and also difficult to evaluate. One of the most popular valuation methods is Sum-Of-Parts: valuing a company by determining what its divisions would be worth if it was broken up and spun off or acquired by another company(Investopedia). However, I like simple PE approach because of its simplicity and something that man on the street will try to have a feel of how much a company worth and they are willing to pay for it. ROE of 10-20% for a conglomerate plus LTAT and other institutional funds as major shareholders attracted me to this company.

As you can see in the picture, Boustead engages in plantation, heavy industries(mostly ships building), property development and investment, finance, trading and manufacturing.

What is striking from that table is most(80%+) of the earning drivers are coming from plantation and heavy industries and property development segments.

Some of the important information regarding its subsidiaries and associates are as follow:
(i) Boustead Plantation 100%
(ii) Boustead Properties 100%
(iii) BHIC 65%
(iv) UAC 65%
(v) Affin Bank 20%

It has closed to about 75,000 hectares planted area and most of them are in the prime time. They can reap the benefits if the CPO is on the uptrend. I would expect the CPO to be around RM 2,200 - 2,400 throughout 2010. This should bump up the division profit to be around 200 mln.

After BHIC came out from its restructuring, this quiet division profit contribution has been significant for the last 3 years and not many pros discover this yet. Orders booking have been relatively resilient especially on Naval side. Commercial ship building especially on dry bulk related has been very ugly globally but BHIC is relatively resiliet because of its revenue stream is coming from off-shore oil and gas industry. RM 150 mln profit should be quite sustainable through 2010.

Property recovery is should delivery stable earnings. I normally don't quite like hotel segment because of its large investment and incurring a lot of debts. They seems to have high confident their 5-star Royale Chulan Hotel and Royale Bintang Seremban Hotel will enhance their earnings together with Mutiara Damansara and Mutiara Rini town together with its stable commercial and retail properties. Let's assign about 50 mln contribution from this division.

Affin Bank has been performing well by bringing down its bad debts and coming out with some innovative products. Boustead should have benefited from Bank of East Asia as one of the major shareholders and tap on its management experience. They can easily booked about 80 mln profit from its 20% stake but their other division of finance is bleeding which I hope their either fix it or close it. They should get the hell out of the insurance business in my opinion. My expectation is 50 mln earning contribution from this unit.

Trading revenue is huge but profit margin is very bad. Let's they are earning 1% on revenue, their earning could be around 30 mln.

On their manufacturing side, the major contribution is coming from UAC which involves in manufacturing of fibre cement. 20 mln should not be a problem.

Adding up all of them, I think Boustead should deliver a min of about 500 mln profit. They incurred close to about 140 mln interest due to its 2 billion plus debts. If they continue to dispose non-core business that they estimated to be around 600 million plus recent rights issues, this should pare down their debts to about 1.8 billion saving interest rate of 60-70 mln/year which I did not take into the account in my 500 mln estimate. Taking the dilution effects of the rights issues, I think they can easily deliver earning of 0.53 - 0.60/share. I would think at $ 3.43, selling for 5 - 6 times earning, investing community is not doing any justice to this company. A company has been paying dividend consistently around 35 sen during so so years and 60 sen during very good years translating to dividend yield of 10-17% gross dividend yield, I will take a bet like this at any given day.

Disclosure : the author has long position in Affin Bank and Boustead Holdings Berhad.

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