Boustead Singapore (KimEng)

Event:

Boustead’s share price has been range-bound ever since it was hit by news that a company project in Libya was adversely affected after unrest erupted in the country in February. Granted, there was no significant price catalyst so far. But we would argue that the market has not priced in the growth in its property leasing portfolio, following the shift in business strategy by the Real Estate Solutions division, resulting in earnings which are more recurring in nature. We reiterate our BUY call and SOTP-based target price of $1.36.

Our View:

Boustead has lined up two property sales, one each in FY Mar13 and FY Mar14, which would bolster its EPS. Although one-time industrial property sales have been a regular part of its business, the company’s latest strategy is to build up a leasing portfolio to generate stable recurring income. In fact, its leasing portfolio has increased from 45,352 sq m in FY Mar09 to 84,002 sq m in FY Mar11. When fully completed, we expect this entire portfolio to generate annual rental revenue of about $20m.

It is this aspect that we argue the market has yet to fully grasp and make adjustments for, especially if it were to view Boustead from purely an earnings perspective. While the leasing properties would contribute to recurring rental revenue, their real worth is vested in their net realisable value. Unlike a one-time sale that will see value realised immediately, a leasing model requires a longer period to achieve the same end.

An analysis of Boustead’s P/E and P/B ratios supports our argument. The stock currently trades within its pre-crisis PER band of 5-8x but below its mean P/B ratio of 2.7x. We believe the importance of its growing property leasing portfolio to the balance sheet has been disregarded.

Action & Recommendation:

Boustead remains capable of making strategic acquisitions with its strong net cash position of $185m, which would serve as a potential catalyst. Fundamentals-wise, we maintain our view that the stock is undervalued and deserves a re-rating. Reiterate BUY and target price of $1.36.