Description

Boustead Project’s (BP) business consists of a design & build business of high spec industrial properties, and an investment portfolio of self-developed leased-out property projects, predominantly in Singapore. The company was listed on SGX in April 2015 when it was spun-off from Boustead Singapore. The last few years, most subsectors of the property market in Singapore have been under pressure as the result of a weakening economy and an increase in supply. We estimate the value of the investment properties at $304ml (net of debt and taxes) and the design & build business at S$135.6ml (8x average last 5Y after-tax earnings). BP has approx. S$119ml in excess cash and a market capitalization of S$273ml, a 51% discount to NAV. Management has a long track record and is focused on shareholder value. This is not your typical family-controlled Asian company that invests in property without a catalyst to close the discount to fair value. BP has expanded its property portfolio to reach the size required to make it possible to launch and manage a REIT. A 2014 JV with a large sovereign wealth fund, Abu Dhabi Investment Council (ADIC), helped achieve this without BP having to put up all the capital. With the current size of its property portfolio and the recent developments in the Singapore REIT sector, the catalyst has become more visible.

We believe an investment in BP offers an attractive risk/reward thanks to: its portfolio of well-managed rental properties, the largest order book in design & build in the last 5 years, a strong balance sheet, good management, and last but not least a stock price at a 51% discount to NAV at market, combined with a potential catalyst to close that discount.

BUSINESS

The business consists of a design & build business and an investment portfolio of self-developed leased-out properties.

PROPERTY PORTFOLIO

BP’s portfolio consists of 13 wholly-owned and six part-owned properties, with over 275’000 square meters of gross floor area.

Wholly-owned Properties:

BP wholly-owns and leases out 14 industrial properties, 13 in Singapore and one in the PRC. The sale of one property has been announced last year with completion expected in 2018Q1.The wholly-owned properties are reported under Investment Properties and Properties-Held-for-Sale. The company provides a valuation by independent agents in its annual reports. The estimated market value as per March 2017 was S$ 351m. Rent, net of land lease expenses, was S$28.4ml p.a., for a rental yield of 8.1%.

More than 50% of the leases are older than 5 years and BP told us in prior meetings that the rent for these leases was 25% to 50% below current market rents. We understand this can be explained by both the way the rent is determined when the leases are signed, and by the increase in market rent over the last decade.

The majority of BP’s properties are purpose-built for multinational companies (MNCs) and then leased out for a long period. The Singapore government offers long land tenures at below market rates to attract these companies, subject to substantial capital investment by the MNC. BP, as owner of the property, leases the land and passes the ‘subsidy’ on to the tenants through a below-market rent. The land tenure is for a longer term than the lease on the building, offering BP downside protection and potential upside if, at expiry of the initial lease, a new lease agreement is signed at improved terms.

Assuming nobody would want to rent BP’s 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 are receiving are slightly below current market rates but still above historical rates.  In the worst case, BP accepts rentals at historical rates which would deliver the total rental revenue that you already see them delivering, which is still satisfactory.

The status of their facilities with vacancies or near-term expiries is as follows:

Caterpillar Berg Propulsion (85 Tuas Avenue 1, Tuas View Project)): Jan 2018

Caterpillar has 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 to another facility (not owned by BP) in a consolidation exercise. The location and specifications of BP’s facility are in demand because there are very few facilities with large open yard space in this area, and also specifically 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. BP is currently negotiating with a party that would be interested to lease the property subject to some minor improvement work.  

Panalpina (16 Changi North Way): Jul 2018

BP believes that Panalpina is very likely to renew the lease and are currently waiting for confirmation.

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, they would have to take up the tenure of a new piece of land, they would have to commit to a new significant capital investment, which would be much higher than what they had originally invested in the current BP facility. The investment amount includes not only equipment but also land tenure and building construction, so the numbers can add up. It that respect, it is favourable to the owners and makes tenants think twice about moving out of a property that was built to suit their needs.

Ausgroup (36 Tuas Road): Surrender Agreement

Last year 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 in the offshore and marine sector. BP recognized this risk when it first bought the property and as such, included a number of protective mechanisms in the contract. The Surrender Agreement includes a surrender sum payable to BP of about S$9.4ml which has been partially offset by an impairment charge on the property of S$3.6ml. The one-off PBT gain was about S$5.8ml. With about two years of rent in the pocket, BP has flexibility in terms of timing to find a suitable new tenant. Furthermore, the property possesses good redevelopment potential and is also attractive as one of the few properties in that area with huge open yard space. There’s a lot of space that the old property was underutilizing. Therefore, BP is currently tearing down the property and will leave it vacant until an agreement has been signed with a new tenant for redevelopment.

UMS Aerospace (25 Changi North Rise)

This property has been sold to the tenants for S$10ml, with completion expected in 2018Q1.

Part-owned Properties:

BP has six part-owned properties which are reported under JV’s and available-for-sale-financial assets. The company does not provide valuation updates for its part-owned properties. Most new projects are expected to take place in the JV with ADIC. Therefore, the valuation of BP’s property portfolio is going to become gradually less transparent in the future if the company keeps to the current reporting.

We value the part-owned properties at book value and we made adjustments for the new GSK and Safran properties.

The properties leased to GSK and Safran were made under the JV agreement: a 30% equity stake in BPD-Vista, a property leased to GSK and a 50% equity stake in BPD-Turbo, a property leased to Safran. These properties were valued based on an independent valuation done in March 2016, before they were completed. We have adjusted the BV for this independent valuation.

No value has been given to new projects such as the Continental building and Mediapolis 1-North, both expected to be completed in the 2018 calendar year.

On this basis, we estimate the market value of the part-owned properties at S$ 70ml.

DESIGN & BUILD (D&B)

BP operates a D&B business that is asset light, focused on high value-added services such as design, engineering and project management of industrial properties, outsourcing low margin building and construction, all of which help to generate a high return on capital. Profit for D&B has been under pressure for several years now with operating margins dropping to below 7% in 2016 from a historical average of 17%, as the result of increased competition and increased foreign labor costs in the Singapore construction industry.

Design-and-build revenue for 1H FY2018 reached $80 ml, 25% lower year-on-year. However, operating margins recently improved from 7,1% to 14,6% as a result of productivity improvements and cost savings.

Design & Build to Lease of wholly-owned properties does not generate D&B revenues. Rather, the costs associated with these projects are being capitalised, and once the buildings are leased out under a long-term lease agreement, revenue starts showing up under the leasing segment of the Income Statement. Going forward, most new projects are likely to be done in a JV, which will generate revenue for the design-and-build segment as BP charges the JV for D&B services; a growth potential for this segment. The company is also pursuing growth outside of Singapore such as Malaysia, China, Vietnam and Indonesia, mainly responding to MNC clients expressing an interest in these regions.

The current order book stands at about S$ 267 million, the highest level in five years. BP has been very successful last year in securing D&B projects in certain sectors such as specialized logistics. BP’s track record has made them the partner of choice for MNC’s looking for top quality logistic facilities. They recently signed agreements with companies such as Bolloré and DB Schenker. BP has also secured contracts for other specialized buildings such as a hazardous chemical waste treatment facility for Veolia.

MANAGEMENT

Boustead Singapore owns 51.25% of BP. Mr FF Wong, Chairman and CEO of Boustead Singapore, personally owns 34.06% of BP’s parent company and he also has a 16.4% direct interest in BP. We believe Mr Wong guarantees that BP will focus on shareholder value with respect for all shareholders. Our confidence is based on an analysis of results, decisions and statements over the last 20 years.

The following quotes give us an idea of Mr Wong’s character:

Upon receiving CEO of the Year in 2009 from Singapore Corporate Awards: “Why me? I never considered myself an outstanding CEO. In any case, I could not have achieved anything without my people, shareholders. They are the ones who should get recognition.”

“Never run your company to win approval and popularity from market watchers. At Boustead, we plod along, unmoved by the opinions of analysts or fund managers.”

VALUATION

We estimate the market value of BP’s property portfolio at S$ 409,2ml based on the approach described above and adjusted for the 3,5% decline in the JTC price index for industrial properties since March 2017. The tax treatment in case of a transfer into a REIT depends on the tax laws at the time of the transfer and the time the properties have been owned by BP before the transfer. We assumed a stamp duty of 5%, a conservative assumption based on the current situation. The shares trade today at a 51% discount to our estimate of NAV.

SUMMARY

At a discount of 51% to intrinsic value and with a potential catalyst to close the discount, an investment in BP offers an attractive return. Our downside is protected by a portfolio of leased industrial properties, a profitable D&B business with a large order book, a strong balance sheet, shareholder-friendly management and a depressed valuation.

Catalyst

1/ improving results for D&B as a result of the large order book and the optimized cost structure

2/ a REIT

BP is working towards a partial exit of the property portfolio through a REIT. The company believes that an exit through a REIT is possible once a size of at least S$ 800ml has been reached. The JV with ADIC reduces the capital required from BP to reach critical size and aims to accelerate this IPO timeline. The following articles gives more information about BP's plans for a REIT and the impact of the JV with ADIC:

http://www.boustead.sg/News%20Coverage/2014/2014-09-15%20Boustead%20Singapore%20secures%20partner%20to%20expand%20its%20industrial%20property%20portfolio%20-%20The%20Edge%20Singapore.pdf

Last month ESR-REIT proposed a merger with Viva Industrial Trust to create the fourth-largest Singapore-listed industrial REIT. This merger is part of a consolidation of the Singapore real estate investment trust market as smaller players merge to cope with rising regulatory costs. This has motivated BP to consider more seriously merging with another REIT as an alternative for launching its own. BP’s ambition is to retain control of the assets, manage the REIT for a fee, and to use the REIT as an exit for its development projects. Its property business would become less capital intensive and the valuation more transparent.

BP's property portfolio stands a good chance to trade near its fair market value inside of a REIT. Singapore REIT’s with strong sponsors, good operating performance and the potential to grow, trade at a premium to NAV.

https://www.bloomberg.com/news/articles/2016-03-22/bigger-is-better-for-singapore-reits-facing-consolidation

https://www.reuters.com/article/us-viva-industrial-m-a/singapore-reits-consolidate-as-warburg-pincus-backed-esr-reit-seeks-merger-idUSKBN1FI0OH