|Shares Out. (in M):||320||P/E||9||0|
|Market Cap (in $M):||235||P/FCF||8||0|
|Net Debt (in $M):||0||EBIT||0||0|
Boustead Projects (“BP”) comprises an industrial real estate portfolio and a very highly regarded design-build business for commercial properties in Singapore. The sum-of-the-parts value is significantly above the market price and a plan to turn the growing property portfolio into a REIT in the next 2-5 years may provide a catalyst to grow and crystallize that value. In the meantime, a FCF yield of ~12% should increase value at a satisfactory clip.
BP was spun out (49% of shares) from Boustead Singapore in 2015. Boustead Singapore has had a phenomenal long-term track record, increasing its book value from ~$30m in 1996 to ~$380m in 2015 (written up on VIC a year ago). This was accomplished under the leadership of Mr. Wong, who was born into poverty on a rubber plantation and who became a highly impressive entrepreneurial success. He has been associated with many successful business outcomes in his career and has treated outside investors fairly. The spinoff of BP to was partially done to unlock long-term value for shareholders.
BP has two main business lines – property ownership and design-build (aka architecture & general contractor).
The construction industry in Singapore is heading into a downturn and faces rising costs. As such, stocks in the sector trade at low trailing multiples. BP has an excellent reputation, but competition has increased and profits in the construction segment have decreased from their historically higher levels (and may decrease further).
BP also has a portfolio of primarily industrial real estate with a market value of ~$400m but does not get proper credit for that value in its current conglomeration with a construction firm. The market’s apathy is exacerbated by BP’s decision not to pay a dividend and instead reinvest in more industrial property (generally custom designed single-tenant projects for multi-nationals with long term leases).
However, that capital allocation is in support of BP’s plan to grow their portfolio to a level (around ~$800m) where they are able to launch a REIT. Singapore REITs with good sponsors trade near their NAV supported by high dividend yields. BP can potentially retain the asset management contract enabling additional capital light earnings while the REIT becomes a low-cost-of-capital buyer of new assets, providing BP’s associated construction firm with a competitive advantage in bidding on projects.
This model is not unique and exists in other Singapore REITs. BP recently brought in an outside capital partner (sovereign wealth fund) to accelerate their property portfolio growth and potential REIT formation. As the designer and general contractor of projects for this JV, BP partly “earns its way” into the equity of new projects, providing BP with a good IRR.
If this all sounds somewhat similar to the recently sullied MLP complex that promoters took too far in recent years, then you’re paying attention. However, while financial alchemy and legitimate tax savings are the presumed catalysts for value to both grow and crystallize, it is worth emphasizing that the stock is already quite attractively priced today.
At a current market cap of approximately $235m BP trades at a FCF yield of ~12%. Roughly 60% of the FCF comes from their portfolio of industrial properties which are in aggregate leased at below-market rents and which currently pay taxes. The remainder comes from their design-build firm which is earning substantially less than it did in the boom times and is very highly regarded as a skilled local firm. Additionally, management is good and is working on a logical plan to lower its cost of capital and create a new competitive advantage for its design-build firm.
Assuming that BP’s property portfolio trades near its fair market value inside of a REIT, there may be ~100% upside to the current levels with reasonably conservative assumptions (just the properties are worth almost double). As such, it appears to be a good risk/reward.
Have ownership interest in Boustead Projects at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on the authors buying or selling activities for this or other stocks. The author may buy or sell shares of Boustead Projects without notice for any reason at any time.
Cyclicality for both businesses. The market sours on externally managed Singapore REITs. Cheap property companies in Singapore (like Hong Kong) are a dime a dozen so people may not care about one more. Mr. Wong’s sons are taking an increasingly large role in Boustead and may not have the considerable talents of their father. Low liquidity.
A few years in the future the property portfolio may be contributed to a REIT.
|Entry||02/01/2017 06:51 AM|
Thanks for the write-up.
1/ We understand that leases on 7 of the 14 wholly-owned properties pay rent at a 25-50% discount to current market rates. This offers downside protection in a difficult property market and upside if new leases are signed at higher rates.
The company believes their downside risk is greatly limited. Assuming nobody would want to rent their properties at revalued market rates, they have the powerful tool of offering discounts to attract tenants in the worst market situation. The enquiries that they're receiving are slightly below current market rates but still above historical rates. In the worst case, they accept rentals at historical rates which would deliver the total rental revenue that you already see them delivering, quite decent still.
2/ We have done some work on the properties with vacancies and near-term lease expiries and are happy to share our analysis with anybody who's interested.
3/ Valuing the D&B at 8X run-rate after tax eanings and the investment properties at the independent valuation provided in the annual report (March 2016) adjusted for recent transactions gets us an intrinsic value of 1.63 per share with current share price at 0.73 (55% discount)
|Subject||Re: Re: 100% upside|
|Entry||02/01/2017 10:46 PM|
also, what's the timing on the REIT - i.e. how long before reaching $800m in property value?
|Subject||Re: Re: 100% upside|
|Entry||02/01/2017 10:50 PM|
Seems like a promising idea to me, just a couple of questions:
- I get 1.16 SGD per share in independent property valuation from the AR2016 by summing all valuation parts
-> If so, I think we should adjust for the volatile Singapore market, according to the JTC prices fell +-10% in Q2-Q4 '16 (see page 12 for single-user factories)
-> Prices fell 15% since '15. I fear this volatility might affect appetite from the Abu Dhabi wealth fund guys to commit more funds to get to our REIT catalyst. Any more colour on the timeline of the REIT?
Quoting from the AR2016 letter to shareholders p18: "Despite no new deals being secured under the BDP during FY16 due to the muted market conditions,"
->Lastly, I found something that looks like a contradiction:
- the last announcement document "Proposed sale of investment in TripleOne Somerset" lays out the following in "sale rationale": "ii) the company's participation in the asset enhancement initiatives of TripleOne Somerset did not materialise" . How does one reconciliate this statement with the following from the current website on TripleOne (http://www.bousteadprojects.com/about_us/key_partnerships.asp)
"TripleOne Somerset's asset enhancement initiative [...] recently commenced."
|Subject||Re: Re: 100% upside|
|Entry||02/01/2017 10:52 PM|
mpk391, I think those are current earnings which are depressed (less than 50%) compared to historical margins. Seems OK to me.
|Subject||Re: 100% upside|
|Entry||02/01/2017 11:02 PM|
Both of you cite a high rent discount to market rates.
What is the source? Is this up to date with the large drop in rents (see same JTC document) ?
|Subject||mpk391: depressed earnings and near-term lease expiries|
|Entry||02/02/2017 07:36 AM|
We value the Design&Build business at 8x annualised 2017H1 after-tax earnings. This should be conservative because:
1/ 2017H1 results are depressed because of increased competition and increased foreign labor cost in the construction industry.
2/ Most of the future investments will be done in a JV and this benefits D&B revenue because BP invoices the JV for D&B services. Development profits and D&B services for wholly-owned properties were reflected in the rent.
The status of their facilities with vacancies or near-term expiries is as follows:
Hankyu Hanshin (10 Changi North Way): 1/3 of space in Aug 2017
1/3 of the total space expired in Aug 2016 but was renewed for another year. 2/3 of the total space will still be on lease to Hankyu Hanshin until Aug 2021. They have stated they will not renew 1/3 of the total space when the extension of one year expires. BP will actively market this vacant space to other logistics providers. Demand should be high considering it is very difficult to find ramped-up logistics space in that area as there is barely any land left in the area and it is popular due to its proximity to Changi Airport.
Caterpillar Berg Propulsion (85 Tuas Avenue 1, Tuas View Project)): Jan 2018
Caterpillar have closed down their entire mining division in Singapore due to the poor global mining environment. As such, their huge mining equipment facility became empty earlier this year and they moved Berg Propulsion and other divisions over to another facility (not owned by BP) in a consolidation exercise. The location and facility specifications of BP’s facility are in demand because there are very few facilities with large open yard space in Jurong, given land usage intensification by JTC, Singapore’s industrial landlord. BP believes that they should have no issues in finding a new tenant who needs large open yard space or a redevelopment opportunity. Also, Berg Propulsion has to pay rent until the end of the committed period so that gives BP some time.
Panalpina (16 Changi North Way): Jul 2018
Panalpina have not been willing to share their future plans on renewal with BP. However, given what we mentioned earlier about lack of ramped-up logistics space near Changi Airport, demand will be good from potential logistics tenants should Panalpina not renew.
Jabil (16 Tampines Industrial Crescent): May 2019
Jabil currently takes up 100% of the total space after they signed a year ago to take up 1/3 more space. With an option to renew in May 2019, BP believes Jabil will probably renew. In Singapore, before land is allocated on a direct basis by JTC, the end-user is required to promise to make a significant investment and this is contractually bound with both BP and JTC. Should Jabil want to move out and take a new piece of land, they would have to commit to a significant new investment, which would be much higher than what they invested in the current facility. The investment amount includes not only equipment but also land and building, so the numbers can add up. In that respect, it is favorable to the owners and makes tenants think twice about moving.
Ausgroup (36 Tuas Road): Surrender Agreement
Last week BP signed an agreement with the tenant for early termination of the lease. BP bought a property from Ausgroup at the end of 2013 and leased it back to them on a 12-year lease. However, the Ausgroup has been affected by the severe downturn of the offshore and marine sector. BP recognized this risk when it first bought the property and as such, built in a number of protective mechanisms. The Surrender Agreement includes a surrender sum payable to BP of about S$9.4 million which will be partially offset by an impairment charge on the property of S$3.6 million. The one-off PBT gain will be about S$5.8 million. With two years of rent in the pocket, BP will have flexibility in terms of timing to find a new tenant. The property possesses good redevelopment potential and is also attractive as one of the few properties in that area with huge open yard space.
We have adjusted the valuation of this property provided in the annual report and the cash position to take into account the impact of the Surrender Agreement.
The company’s announcement provides more details on the Surrender Agreement: http://infopub.sgx.com/FileOpen/BPL_Announcement-Termination_of_Lease_in_relation_to_36_Tuas_Road-25.01.2017.ashx?App=Announcement&FileID=437024
UMS Aerospace (25 Changi North Rise)
UMS Aerospace currently leases 30% of the total space. BP are in active talks with potential tenants/buyers for 100% of the total space as is, or redevelopment or an outright sale as this is the only property in the first six properties in the portfolio that has a land tenure of only 30 years, without any option for another 30 years or a straight 60 years land tenure.
Multi+Panalpina (12 Changi North Way)
This property, a multi-tenant property, caused a temporary drop in BP’s rental revenue when a large tenant (DHL) moved out. A new tenant was found in less than three months. Throughout its more than 10-year history, this facility has rarely been below 100% occupancy due to its good location and the reasons we mentioned earlier for Hankyu Hanshin and Panalpina. The property consists of 3 facilities that are connected, sharing ramp-up logistics in the most productive and efficient design arrangement for that whole area, which is why JTC gave BP priority on taking up the three parcels there in various phases.
|Subject||punchcardtrader: rental upside and NAV|
|Entry||02/02/2017 08:52 AM|
RENT AT DISCOUNT
1/ From our conversations with the company we understand that leases on 7 of the 14 wholly-owned properties pay rent at a 25-50% discount to current market rates. This seems credible because:
a) market rents have increased since the start date of the older leases
b) JTC offers land leases at below market rates to companies it wants to attract to Singapore. Most of BP’s projects benefit from a subsidised land lease and this results in a below market rent as BP passes the advantage on to the tenant. However, the term of the land lease is much longer than the lease agreement offering downside protection and upside if the lease is not renewed.
Stamp Duty 22m (tax treatment uncertain so this is a guess)
Net Cash: 10m
NAV: 521m or 1.63/share
We value the wholly-owned properties at 363m as per AR, the part-owned properties at the valuation provided in the IPO document (53m) and made adjustments for transactions post March 2016. Adjustments were made for the Ausgroup Surrender Agreement, Tripleone Somerset sale and a valuation per March 2016 for the GSK and Safran projects. We have not taken into account the price declines in Singapore property since March 2016. Price changes depend on location and type of property but it’s safe to assume that the valuation in the next annual report will be lower.
BP has recently announced 2 new projects in a JV with Abu Dhabi: Continental phase 3 and Mediapolis 1 North so it does not look like they’re backing away from doing more deals.
BP co-invested with consortium partners, led by Perennial, in TripleOne Somerset in January 2014. BP invested S$17.9 million for their 5.5% stake. A few days ago, they signed an agreement for the proposed sale of our 5.5% stake to Shun Tak, along with BP’s consortium partners. BP’s expected share of sales consideration will come up to S$27.5 million. The one-off PBT gain will thus be about S$8.9 million after deducting divestment fees, a 50% return on equity in the space of three years. BP decided to exit as the offer was too good to pass up and also they do not have a further role in the asset enhancement initiative that is currently ongoing.
|Subject||Re: Re: punchcardtrader: rental upside and NAV|
|Entry||02/02/2017 11:59 AM|
The timing of the REIT will depend on the size of the property portfolio and market sentiment.
We think that your estimate of at least 3 years and another 14 projects to reach the minimum size for a REIT is conservative. A JV allows BP to do larger projects because they only have to put up part of the equity.
The GSK and Safran properties together are probably worth close to 150m, Mediapolis 1 North is a 88.8m project and Continental phase 3 is probably close to 30m.
Based on these projects alone the portfolio that can be sold into a REIT will reach 700m by next year.