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Sixty One Percent Invested, Thirty Nine Percent Cash

Sixty One Percent

The below quote was taken from Boustead’s chairman message in their annual report 2016. It got me into deep thoughts whether I am using my cash in the right way to invest.

“Investing for long periods in cash is not desirable. But in the short run cash is like an option over every asset class, with no expiration date and no strike price. Cash provides the option to sweep up a bargain when it becomes available and this must have some value above the fact it earns almost nothing. If the purpose of an investment portfolio is to grow as well as protect the wealth you’ve accumulated over the years, doesn’t it make sense, if you can afford it, to also hold an option?”

– Roger Montgomery

When analyzing companies, we sometimes look at the free cash flow. Hogging plenty of cash means the company is cash rich but may also means the management has no direction or strategy where to invest to grow the company.

Personally, I felt the free cash flow model can apply to individuals as well. If you have followed my blog since last year, you will have realize I have been making purchases every month. This has left me little cash on hand when opportunity arises.

After reading the quote from Boustead’s chairman message, I calculated my invested amount versus my cash on hand. I am 61% invested and have 39% cash on hand. Personally, I feel having 39% cash is too little when opportunity arises. Since the market is also expensive now, I hope to accumulate more cash for the next opportunity.

What do you think is the ideal ratio for investment versus cash on hand?

Boustead Creating a World of Difference

Creating a World of Difference

You know you are investing in the right company if they have excellent management. A company with excellent management is able to weather the storm. This has to be Boustead, my favorite company in my stock portfolio.

What do I like about Boustead that stands out?

1. Asset Light Model

A shareholder in Boustead is not a beneficial owner of hard assets such as equipment, machinery and fabrication or manufacturing facilities. Instead, you are a beneficial owner of a renowned brand name that has thrived for 188 years on the basis of our strong values and reputation for credibility, integrity, quality, reliability and trust; – Wong Fong Fui, Chairman & Group Chief Executive Officer

2. Cash Flow Driven Business Model

Free cash flow of $110.0 million remains strong for Boustead. The cash flow driven business model (asset light) allows Boustead to weather the current headwinds. A final dividend of 2 cents was declared. This has proven they have no issues sustaining their dividends in bad times.

Our cash flow-driven business model places us in a strong position to weather the storm. Our balance sheet is steady with a net cash position of S$165.6 million. – Wong Fong Fui, Chairman & Group Chief Executive Officer

3. Ongoing Acquisitions

If you follow the news, Boustead has tried to acquire three businesses in FY2016.

First, they tried to acquire a gas field with proven reserves in Indonesia. However they were outbid by their rival. Boustead felt there was a lack of margin of safety should they overpay for the bid.

Second attempt was in the energy related sector for a business providing engineering services for gas related infrastructure. Boustead did not pursue after detailed investigations.

Third failed attempt was in the real estate sector. Information was not forthcoming and thus Boustead did not pursue further.

Although all attempts failed, Boustead can be seen as being careful, diligent and patient in their acquisitions.

Acquiring a business is easy. Acquiring a great business is most difficult. – Wong Fong Fui, Chairman & Group Chief Executive Officer

Succession Planning

Wong Yu Loon, elder son of Wong Fong Fui was appointed Deputy Group Chief Executive Officer. Spending 13 years in Boustead, I believe he has picked up the ropes in the job from Mr Wong Fong Fui.

Boustead Revenue and Net Profit fell for 3Q FY2016

Oil and Gas

On 12th February, my favourite company, Boustead Singapore Limited announced its 3Q FY2016 financial results.

The revenue of S$142.3 million for 3Q FY2016 was 20% lower than 3Q FY2015. Net profit of S$7.5 million was 36% lower than 3Q FY2015. If you take into account the demerger and other gains and losses, then net profit for 3Q FY2016 would be 16% lower year-on-year.

Mr Wong Fong Fui, Chairman and Group Chief Executive Officer of Boustead said,

“All our divisions continued to deliver profitability even in these harsh business conditions. Nonetheless, our businesses face significant challenges and especially our Energy Related Engineering Division with the further slide in global crude oil prices. We continue to proactively manage our costs to partially mitigate these circumstances.”

Financial Results

3Q2016 (S$) 3Q2015 (S$) Change (%)
Revenue 142.3m 177.9m (20%)
Gross Profit 42.2m 42.0m 0%
Profit Before Income Tax 15.7m 18.4m (15%)
Total Profit 11.3m 12.6m (10%)
Profit attributable to equity holders of Company (“net profit”) 7.5m 11.8m (36%)
Net profit (adjusted for Boustead Projects demerger) 7.5m 10.5m (29%)
Earnings Per Share 1.4 cents 2.3 cent (39%)

Energy Related Engineering Division

Revenue at the Energy-Related Engineering Division to drop 35% to S$31.0 million. Profit before tax at the Energy-Related Engineering Division was severely impacted by poor performances at the upstream oil & gas, water and waste water engineering and solid 3 waste energy recovery businesses.

Geo-Spatial Technology Division

The Geo-Spatial Technology Division generated revenue of S$25.7 million, down 17% year-on-year.

Real Estate Solutions Division (Boustead Proejcts)

Revenue at the Real Estate Solutions Division fell 14% to S$85.6 million.

Things to Note

  • Order book backlog of S$343 million. (Energy-Related Division S$115 million and Real Estate Solutions Division S$228 million)
  • Healthy balance sheet of S$126.9 million net cash position.
  • Looking for acquisition after potential acquisition of Indonesia energy asset fell through.

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