Boustead Projects (SGX:AVM)

First a hat tip to @aceglobalvalue and @backoftheenvelo for their extensive notes on BP. I will summarise my thoughts on the situation, but props should go to them for doing the groundwork.

 

Situation Summary

Boustead Projects is an OpCo/PropCo idea, with a high probability of the hidden Real Estate value being realised within a year, through the establishment of a REIT. The founder and controlling shareholder (via personal holdings & Boustead Singapore) has a history of creating value and sharing the rewards with minorities.

 

Overview

The company has two main business units:

  1. Design & Build: a “consultant” type company that provides a turnkey solutions to large businesses in the design of complex industrial buildings, predominantly in Singapore. Very strong market position, consistently generates profits, but kind of cyclical
  2. Leasehold Portfolio: combination of wholly owned and JV’s in a portfolio of industrial properties that they developed and maintained the leasehold to

 

The company is controlled by Boustead Singapore/FF Wong. He is an interesting Singaporean businessman who has been extremely successful in taking over and turning around troubled businesses for the past 30+ years. He established the Boustead Projects group within Boustead Singapore in 1999 within the ParentCo for S$1m and spun off 49% off in 2015.

 

Situation

Currently available the company is available for S$300m market cap. The wholly owned properties are on the books for ~S$200m but this is cost less depreciation. Fair market value is ~$426m (based on independent valuers’ assessment in notes of the annual report, and sense checked against current distributable earnings and a reasonable cap rate). They also have S$40m in JV’s (at cost, therefore, likely undervalued), $100m in cash and $160m in debt + commitments to JV’s. Therefore, the balance sheet alone is likely worth ~S$400m

 

This isn’t just another “HoldCo” or “Property” discount story either. For years they have been building the leasehold portfolio up with the intention of realising the value through the creation of a REIT, once it reached a sufficient scale. The total portfolio’s gross asset value (including JV’s) is now ~S$1bn and is large enough to warrant an independent REIT. The wording around monetisation changed significantly in this year’s annual report as it has become a priority for the Board. With the recent successful IPO’s of other industrial REIT’s in Singapore, now seems likely to be the time that they will look to monetise a portion of their stake (wont exit completely, but will sell down and retain the property & asset management rights, becoming more like a fund manager)

 

On top of the balance sheet, the Design & Build business currently has its largest ever backlog (equal to 3X last year’s revenues). Take the 5 year average PBT and using a 5X multiple gets a valuation around S$100m, taking the total group value to ~$500m, or 65% above last traded price.

 

Risks

  • Downturn in Singaporean Industrial property market
    • Market has been in a bad way for many years, so risk is more likely to the upside
  • Failure to return any cash to shareholders
    • Probably unlikely, as FF Wong is getting older and probably wants to bring some cash back up to the holding company for future acquisitions
  • Loss of appetite for Industrial REITs

 

Conclusion

Seems like a low downside, decent upside bet, with a relatively short duration. It’s currently trading at tangible book value (cost less depreciation), providing downside protection. The founder controls the company and has a history of being a good capital allocator and looking after minorities. Therefore, I think it’s likely that at least a portion of the cash received from the REIT will be distributed to shareholders. The rest will be retained for future development projects to utilise their captive REIT.

 

Valuation

AVM1

Appriased values based on the notes within the Annual Report