Boustead Projects Limited (‘BP’) is a leading industrial real estate solution provider listed on the SGX. It provides high-specifications industrial projects that are built to suit its clients’ needs on a turnkey basis. It is also the real estate business arm of mainboard-listed, engineering services group Boustead Singapore. By way of issuance of dividends in specie of BP shares from Boustead Singapore, BP IPO-ed on 30 April 2015 at 88 cents with ticker code SGX:AVM. As at 21 June 2019, it has a market capitalisation of SGD$285 million. The business model of BP is plain and simple; it offers 2 types of services to its clients.
Business Model of Boustead Projects Limited
As seen its Diagram 1, BP offers (i) Design and Build services and (ii) a Leasehold Portfolio for its clients to lease office space from.
1) Design And Build
Boustead Projects E & C Pte Ltd, BP’s wholly-owned subsidiary, offers a full suite of industrial real estate solutions to meet every client’s unique requirements and specifications. It engages the clients at a very early stage of development so that it can consider, interpret and understand their needs, processes and strategies and then help to carry out the financial and feasibility studies. BP can design and build industrial facilities, business parks and commercial buildings. Its track record include over 3 million square meters of industrial real estate spanning over 170 projects in Singapore, Malaysia, Vietnam and China. In addition, BP is one of the few approved developers by Singapore Building & Construction Authority (‘BCA’) to execute construction contracts of unlimited value.
The Design and Build industry is actually a niche segment with fewer participants in the market compared to construction industry. Most importantly, BP serves as the overall Project Manager and outsources the labour-intensive construction works to general construction companies. It is therefore less reliant on cheap foreign labour and less plugged in to the razor-thin margins commonly associated with the construction sector.
2) Leasehold Portfolio (Design And Build And Lease)
Besides helping its clients to design and build their facilities, BP also offer to own these buildings on their behalf. This is known as “Design, Build and Lease (‘DBL’). BP’s clients span from a wide spectrum of industries such as Aerospace, Precision Engineering, Logistics, Healthcare, Pharmaceutical etc.
The DBL solution helps BP’s clients to free up capital so that they can focus on their core businesses and maintain an asset-light strategy. This is a highly popular solution as BP is there throughout the entire customer journey; from designing, building, and maintaining the asset. Typically, before proceeding with a custom DBL project, BP would have already secured its end-customer and fixed the commercial leases terms. This allows BP to have a good gauge of the profitability of the project before it even commences.
In taking over this burden on behalf of the client, BP needs significant balance sheet ammunition. That is why it has utilised fund management platforms where strategic investors to provide the necessary equity for BP to scale quickly. Some of these strategic partnerships worth highlighting are:
A) Boustead Development Partnership (BDP)
This is a partnership with Abu Dhabi Investment Council (ADIC) since 2014 with an initial development target of over $600 million when fully leveraged. Since its inception, its has secured 6 development projects, the most notable of which is ALICE@Mediapolis.
B) THAB Development Sdn Bhd
This is a partnership platform with AME Construction Sdn Bhd, Tat Hong Holdings and CSC Holdings Ltd established in 2013. It recently completed a logistics hub at the Port of Tanjung Pelepas which caters to corporations looking for quality logistics space at the port.
C) Echo Base JV
Established in 2018, this is a real estate fund management and services platform focused on the development, investment and management of smart buildings and integrated developments across Asia Pacific in global gateway cities. One of the investors is the CEO of Razer. Not surprisingly, its maiden project is the Razer SEA HQ announced in late 2018. This strategic partnership could potentially pave the way for BP to enter into non-industrial asset classes and enhances its geographical reach.
With all these additional firepower, BP has built up a sizeable leasehold portfolio consisting of 24 properties, of which 19 are completed and 5 are under development.
Investment Merits of Boustead Projects
1.Record Order Book
Since end 2018, news of BP’s multiple contract wins have come fast and furious. As at FY2019, BP’s order book backlog stands at $660 million. Diagram 2 will tell the story best.
With its Design and Build division ending FY2019 with thrice the usual order book, it is the main reason why Heartland Boy bought into this stock. It is not just the size of the order book, but the number of firsts that it achieved in the recent contract wins:
- 10 Dec 2018- First public sector contract to build JTC multi-storey recycling facility awarded via the GE BIZ tender process
- 21 Dec 2018- Awarded contract to build the iconic Razer SEA HQ
- 18 Jan 2019- Largest private sector construction project in BP history as it was awarded the contract to develop Surbana Jurong Campus
Heartland Boy believes that BP is finally reaping the fruits of years of investing substantially in advanced capabilities with industry 4.0 transformation and market-leading standards. Assuming that it had not been overly aggressive in its bid submissions, these contract wins will have significant positive impact to its bottom line. Assuming a net profit margin of 9%, the current orderbook will translate into profits of ~$60 million to be recognized progressively in FY2020 and FY2021. That means the contribution from D&B division alone will match the Group’s annual profits of previous years.
2. Leasehold portfolio recorded at cost less depreciation
BP’s wholly-owned properties are recorded on its balance sheet at cost less depreciation. It therefore does not have the accounting practice of marking its investment properties to fair market value. Therefore, what is recorded on its balance sheet is not a true reflection of the value of its properties. For instance, in its FY18 annual report, BP’s Chairman and Managing Director revealed that the market valuation of its leasehold portfolio has already approached $800 million. (Note that this could potentially include properties which BP do not hold 100% shareholding)
When compared to its balance sheet, the total value of its investment projects (10 projects) and properties held for sale (5 projects) was only $159.5 million. In its 4Q19 results announcement, the total value of its investment projects and property held for sale have since grown to $208 million as it was boosted by some property completions in year passed. As the FY2019 Annual Report is not yet published at the time of this blogpost, Heartland Boy is unable to derive the professional valuers’ valuation of its investment properties and properties held for sale.
Nonetheless, going by FY2018, it is acknowledged that a significant gap exists between what is recorded on the books and the true economic conditions. This suggests that BP’s shares are significantly undervalued. However, there is little value talking about such a discount gap unless the portfolio can be unlocked to return value to the shareholders- i.e. the properties must be sold in order for shareholders to enjoy the capital appreciation.
3. Possible REIT Listing In The Short Term
When BP was spun off from Boustead Singapore, a possible medium goal was to seek an industrial REIT listing by spinning off its leasehold portfolio. It was a medium-term goal because it takes time to build up a portfolio (close to $1 billion) that is sizeable enough to be spun off into a REIT. As Viva Industrial Trust and ESR-REIT have shown, it is necessary to have scale to command a decent market valuation.
As the various fund platforms have allowed BP to scale up quickly, the REIT dream is no longer a medium-term goal anymore. In fact, Heartland Boy feels that this could potentially take place in the next couple of years. If that happens, the severely undervalued leasehold portfolio will then be able to reward shareholders (perhaps by way of a special dividend) with the capital gains that it has made over the years. In addition, the establishment of a REIT platform would accelerate BP’s future capital recycling efforts and it will allow them to consider taking on even more development projects under its leasehold portfolio.
Investment Risks of Boustead Projects
1. Government Policies And Regulations
BP operates in the industrial segment and like any other real estate sector, it is exposed to government’s policies and regulations. As Heartland Boy found out via APAC Realty and Roxy-Pacific, the Singapore government will not hesitate to take a strong interventionist approach if it sees the need to. So far, the government continues to promote high-value industrial sectors that BP is focused on.
2. Bitten Off More Than It Can Chew?
While the recent contract wins and record order backlog is definitely something to rejoice about, Heartland Boy is mindful that this could also invite questions such as compressed margins and execution capability. It is important to consider whether:
- BP had been too aggressive in its bids? If that is the case, its operating margins could be compromised.
- Would BP be able to execute these contracts in time since current backlog is almost 3 times of what it has traditionally handled? If it fails, it might face liquidated damages or reputation losses.
If Heartland Boy were to hazard a guess, it is likely that BP was not in any desperate situation to secure these contracts. He doesn’t see it worthwhile to ask its Investor Relations department as such a question would generally elicit a standard response. Instead, if Heartland Boy is able to make time for its upcoming Annual General Meeting (‘AGM’), he would like to ask the Board of Directors these questions directly. Meanwhile, he will continue to monitor the margins going forward as shown in Diagram 3.
3. Receipt of Writ Of Summons
In Nov 2018, YCH Holdings filed a claim that it suffered damages in the sum of S$2.33 million between 2012 to 2014 as a result of a breach of contract from BP. BP has stated that it will defend the claims vigorously but the result of which is only likely to be made known in FY2020. Viewed in totality, this represents less than 10% of its annual profits and Heartland Boy assesses this risk event to be small.
Review of Boustead Projects
BP is led by an experienced management team (MD is Thomas Chu) and has reported solid financials since it debuted as a listed entity. According to Bloomberg, at a share price of 0.915 cents, Boustead Projects has a dividend yield of 2.2% and a Price/Book Ratio of 0.91. Shares buyback was last done at March 2018 at a stock price of $0.80. It is unlikely that this will continue in the near term as BP would require plenty of cash to carry out the development works (eg: Braddell Road GLS tender that it won end of last year)
Employing a discounted cashflow methodology to value Boustead Projects, Heartland Boy derived at a target price of $1.20. This does not factor into the scenario that BP is able to unlock the value of its undervalued leasehold portfolio. There is currently no analyst research report that covers Boustead Projects although CGS-CIMB recently released a “non-rated” report on it.
Vested at an average price of 0.93 cents since early June 2019. He will continue to share his thoughts of Boustead Projects on forums such as InvestingNote.
This article was published on 23 June 2019.