At 22% of our full-year forecast, Boustead’s 1QFY3/16 core net profit was deemed below our expectations as we expect poorer earnings outlook in the remaining year.
We cut FY16-18 core EPS estimates by 19.6%-27.4% in view of
1) the protracted challenging business environment for its energy division and
2) the subdued profitability of the geospatial technology division due to the weakened A$ versus the US$.
While we continue to like Boustead for its sound financial position and core engineering capability, we need some meaningful catalysts to re-rate the stock. We maintain a Hold rating on Boustead, with a lower target price of S$1.06, based on a 25% holding company discount to its FY3/16 SOP valuation (previously a 10% discount).
1Q16 financial results highlights
Adjusted for the 48.8% demerger of Boustead Projects (BP), Boustead’s 1Q16 revenue declined by 8% yoy and core net profit by 13.8% yoy on broad-based weaknesses. Pre-tax profit for the real estate, energy and geospatial divisions fell by 22%, 62% and 33%, respectively. While the challenges for real estate and energy have been well-guided, we highlight the dip in revenue (-11% yoy) and margin (18% vs. 20%+ previously) for the geospatial division due to the weakened A$ against US$ and S$. Boustead’s current order book stands at a relatively healthy level of S$344m (real estate: S$214m; energy: S$130m).
Business environment remains challenging
Management guides for a cautious business outlook, as headwinds from China and Europe could have an adverse impact on the industries that the group serves. Delays are expected for the award of sizeable contracts from global oil & gas industries. Future gross margins are likely to be affected due to stiffer competition for contracts, though cost management measures have been put in place to partially mitigate the impact. In addition, the geospatial division may stay subdued by the weak A$, which tends to correlate with China’s economy.
We believe that the sound financial position could help Boustead to navigate the downcycle with flexibility. Excluding those parked under the separately listed BP, Boustead has zero debt, S$136m cash and S$40m available-for-sale financial assets as at end-1Q16. The cash could be earmarked for potential M&As when the right opportunity emerges. (Read Report)
Source : CIMB Research