Boustead SG (SGX:F9D) – Share Price Undervalued on SOTP Basis

  • Improving prospects on Real Estate and Geospatial technology segments should re-write the Boustead narrative.
  • On a SOTP basis, I think Boustead should trade at $1.45 per share, an upside of 85% from current levels. This makes Boustead share price undervalued.
  • While the value creation will not happen overnight, investors who own the stock in the long run should do quite well.
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Overview

Boustead Singapore Limited (SGX:F9D) is a global Infrastructure-Related Engineering and Technology Group. Boustead focuses on the niche engineering and development of key infrastructure to support sustainable socio-economic growth in global markets. For example, their Energy Engineering Division and Real Estate Division centres on energy infrastructure and smart eco-sustainable business park and industrial developments.

Boustead has 4 business segments, Energy Engineering, Real Estate, Geospatial and Healthcare.

Business Overview of Boustead Singapore
Business Overview of Boustead Singapore

Improving prospects on Real Estate and Geospatial technology segments should re-write the Boustead narrative

Revenue Breakdown of Boustead Singapore FY20 results
Revenue Breakdown of Boustead Singapore FY20 results

From their company snapshot, Real estate and Geospatial Divisions are their biggest profit contributors. The 2 divisions are also expected to continue to grow.

Geospatial Division

Boustead’s Geospatial Division exclusively distributes Esri ArcGIS technology, – the world’s leading geographic information system (“GIS”), smart mapping and location analytics platform – along with related GIS solutions for major markets in the Asia Pacific.

FY2020 is the fourth consecutive year of revenue and PBT growth. This is due to their marketing efforts and investments in educating users. It paid off by seeing growing demand for their geospatial solutions over the years.

While the geospatial division’s overall growth has stabilised in the single digits region, recent developments are encouraging. The pandemic has emphasized the importance of geospatial technology. It has also emerged as a key capability of a smart nation.

https://www.straitstimes.com/tech/coronavirus-geospatial-technology-more-important-than-ever-amid-pandemic

Boustead also managed to clinch a A$30mil contract from the Australian government in August 2020. This will have a positive material impact on the profitability of Boustead FY2021 results.  

Management has highlighted that they are seeing steadfast demand for geospatial technology across Australia and South East Asia. Geospatial data plays a key role in the climate change adaptation. We are experiencing drastic climate change conditions and there are increasing concerns over public safety. (eg. Wildfires in Australia)

Hence, I believe that demand for geospatial analytics solutions in the climate change adaptation is expected to grow.

Below is an informative blog post on how businesses can use GIS to improve their business prospects.

https://esriaustralia.com.au/blog/artificial-intelligence-and-location-intelligence-business-guide

Real Estate

Boustead Projects (SGX:AVM), Boustead Group’s real estate arm, has three segments.

1) Design and Build

Boustead Project’s design-and-build business provides turnkey solutions for custom-built smart eco-sustainable business park and industrial developments. They have a track record of more than 3mil sqm of industrial real estate in Singapore, China, Malaysia and Vietnam.

To remain on top of the competition and protect their margins, Boustead Projects focuses on pursuing projects in higher value sectors such as medical technology sector and high-tech manufacturing. At the same time, they utilise technology such as Building Information Modelling (BIM) and Cloud-based project management apps like “Lean Plando” to increase efficiency and productivity.

2) Leasehold Portfolio

Boustead Project’s Design, Build, Lease approach allowed them to build a growing base of quality leasehold properties that provides recurring revenue. They have also expanded their services to development management and asset management to increase their revenue streams.

3) Strategic Partnerships and Investments

Boustead Projects has established and invested in several strategic partnerships and platforms. This enhances their competitive position and helps to expand across Asia. These partnerships helps to complement and provide more opportunities for their D&B and Leasehold Portfolio segments.

Unlocking value from its leasehold portfolio

How to get the most value from their growing leasehold portfolio? The most sensible way is the formation of an industrial real estate investment trust. This allows Boustead Projects to free up capital for future growth and investments.

FY2020 AR

This statement has been repeated for a few years now. This was raised again during the Advance Q&A before their AGM.

I feel that there is still some uncertainty with regards to the timing of REIT listing. This is because their portfolio is still somewhat smaller (compared to the other SG industrial REITs). However, prospects are improving as they have upcoming development projects that will bring their leasehold portfolio asset base to about S$1.2bn by FY2021.

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Valuation

It seems fair to use the sum-of-the-parts valuation technique for Boustead. This valuation method is used when a company has different segments in different industries that have different valuation characteristics.

Boustead share price undervalued

On a SOTP basis, my fair value of Boustead lies around $1.45, implying a 85% upside from current share price of S$0.78. I have applied a 30% discount to the value in acknowledgement of possible unknowns which I have missed out. Even so, this still makes Boustead share price undervalued.

My valuation of their real estate business is less conservative as I used the independent valuation of their investment properties. The amount indicated in their balance sheet is booked at cost value. I assigned a large 50% discount to the valuation as the timing of when BP’s value will be unlocked is still uncertain.

Boustead share price undervalued
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Investors who own the stock in the long run should do quite well

This is not an overly complicated thesis – Boustead has highly valuable assets whose discount to fair value is not yet being appreciated by the market. The discount can be resolved in several ways. The management team is taking steps to address this.

  1. Assets with economic moat

I’m referring to Boustead’s stake in Esri Australia and Esri South Asia. They are the world’s leading geographic information system (“GIS”), smart mapping and location analytics platform. The pandemic has led to a significant spike in demand for their services.

2. Incentivized owners with share buybacks in place

Chairman and Group CEO FF Wong owns a large stake in the Group. Hence his interest is aligned with the rest of the shareholders. In addition, the company has been consistently buying back shares.

3. Opportunity to unlock value from real estate

While part of the investment thesis is that the asset value of the company, there is also a way for further value to be created by Boustead. The company stated that they are actively looking to unlock value from their leasehold portfolio. Although timeline is uncertain, doing so could provide a rerate of the share price as the properties are booked at cost value.  

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Conclusion

Boustead is substantially undervalued at its current price. I view the size of the valuation discrepancy and the economic moat of its assets as providing a margin of safety for the investment. There is also the catalyst in place with regards to the potential REIT listing of its leasehold properties portfolio.

I think the shares are worth about $1.45 (85% upside). This makes Boustead share price undervalued. I expect the valuation disconnect to close as its assets continue to do well, driven by the Real Estate and Geospatial Divisions. Investors will then start to appreciate its value.

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The Moss Piglet is vested in Boustead Singapore shares.

One thought on “Boustead SG (SGX:F9D) – Share Price Undervalued on SOTP Basis

  1. Good job. Did you value the re division by using bp’s market price? If so, then did you net out proportionate bp’s net cash from boustead’s net cash when doing the sotp? Otherwise there might be double counting since I believe bp is consolidated within Boustead.

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