Dear Fellow Shareholders,
It gives me great pleasure to present to you the Boustead FY2011 Annual Report for the financial year ended 31 March 2011.
In FY2011, we crossed extremely harsh terrain. We were fortunate to escape with no loss of lives.
For the first nine months of FY2011, the journey was a little bumpy but generally smooth. In fact, immediately after the release of our 9M FY2011 financial results – which had been better than at any point in my 15 years with the Group – I had harboured the hope that we might produce another record set of financial results for FY2011, picking up from where we left off in FY2009 after a superb run of seven consecutive years. However, my hope was dashed when the civil war broke out unexpectedly in Libya just a month before the end of FY2011. We still achieved record revenue of S$560.6 million and attained our second highest level of net profit of S$52.2 million, even after having set aside provisions for Libya. Without these provisions, net profit would have easily surpassed our record set in FY2009. Despite all of this, I would declare FY2011 as a good performance.
FY2011: Navigating the Harsh Terrain of Libya
FY2011 had been dominated by newsworthy events across the globe. Quadruple threats emerged from most regions of the world including the slow economic recovery of the US, the debt crisis in Europe, the Arab Spring in MENA and the severe earthquake, tsunami and nuclear problems that hit Japan. Yet, only one event truly rocked Boustead’s world – that of Libya.
Early into FY2011, our outlook appeared promising. We were performing well across the Group, had a healthy order book and even managed to increase the pace on our most challenging project, the new township in Libya. Nine months passed and we headed into the final quarter in a better position than we had ever been in. Then, the revolution in Tunisia struck in January 2011, followed shortly by that in Egypt. Even then, the situation in Libya seemed rather calm and peaceful. Little did we expect Libya’s political upheaval to be worse than that of Tunisia and Egypt.
Backtracking a little, we first embarked on the new township in Libya in August 2007. It was a grand vision for Libya; tens of thousands of homes being constructed east of Benghazi for the people by foreign engineering corporations like Boustead. It was the beginning of a major national development effort; it was also the onset of our problems.
On hindsight, the construction of the new township was made more challenging by the unavailability of local equipment, machinery and manpower. Almost everything had to be imported. It meant that we had to make a much larger financial commitment than we were used to.
From FY2008 right up until midway through FY2011, nothing proceeded smoothly for the new township – whether it was bureaucratic, commercial, cultural or natural (yes, even the weather gave us problems) in nature. By 2Q FY2011, we encountered a new problem, that of increasingly slow payments from the client. Recognising a growing risk linked to the fact that the Libyan government had overextended itself by awarding far too many projects simultaneously, we decided to take firm action by promptly restructuring our joint venture, thus reducing our share from 65% to 35%. We significantly cut our overall risk and likewise, our staff strength. It seemed like a good move at the time. Unfortunately, it still came a little too late.
On 15th February 2011, the first signs of violence emerged at street protests in Libya. It triggered our internal planning and discussion with our staff for an emergency evacuation if necessary. On 18th February, our staff continued to hold their regular meetings with our joint venture partners and clients on how to proceed on two projects there. By 19th February, we had officially ordered an evacuation. To witness how rapidly the situation had deteriorated from minor skirmishes to total chaos in a matter of 48 hours caught everybody by surprise and placed us right in the middle of the most violent confrontation in the Middle East. Our priority at that moment – to get our staff safely out, sparing no efforts in doing so.
Thankfully, with the quick go ahead for an evacuation – 19 staff at the new township caught the last flight out of Benghazi on 19th February, moments before the airport closed. They joined 12 other staff in Tripoli. The next day, nine of the 31 staff flew out of Tripoli and returned safely to South East Asia. However, the remaining 22 staff were trapped in Tripoli after the airport closed and international airlines ceased flights. The situation became extremely tense. Mustering all of our available resources and with the help of International SOS, we managed to get our remaining staff onto one of an extremely limited number of flights leaving the country on 23rd February. We were one of the first foreign corporations operating in Libya to get all of our staff to safety. Within a week of commencing our evacuation, we returned all of our staff safely to their families across South East Asia – fulfilling our responsibility as a good employer.
Although things did not go as planned in Libya, we should still applaud the efforts of all of the staff who were based there for having sacrificed in a country far away from home, enduring many hardships and surviving such a traumatic experience. It was certainly a difficult time for them.
We have set aside provisions for two projects in Libya and also successfully obtained an interim injunction from the High Court in Singapore against the liquidation of our guarantees, which should allow us to put all our troubles in Libya behind us. We will continue to closely monitor the situation and will keep our shareholders informed of the progress.
Strong Profitability Elsewhere
Due to the provisions, we were unable to achieve a second consecutive year of broad-based profitability across all four core operating divisions – with the Water & Wastewater Engineering Division falling victim to the circumstances in Libya. However, the other three core operating divisions enjoyed strong profitability.
At the Energy-Related Engineering Division, revenue charged ahead to S$140.9 million, up 15%. However, profit before tax fell 15% to S$17.0 million due to tighter gross margins, particularly for large projects won in the downstream oil & gas industries under a more competitive business environment. In recent times, Korean EPC corporations have come to dominate contract wins in the Middle East – effectively side-lining the once-dominant Japanese, as well as Americans and Europeans – with more competitive bids. The changing business environment has forced us to adapt quickly as we cater to the new players in the Middle East. We also witnessed the revival of US$100 crude oil for the first time since the economic downturn hit. By April 2011, crude oil prices peaked at over US$120 per barrel and have barely retreated from those heights. This is whetting the appetite for major investments in oil & gas infrastructure globally, boding well for us in the future.
The Water & Wastewater Engineering Division had a 48% decrease in revenue to S$28.7 million. The division also posted a pre-tax loss of S$1.7 million due to a provision made for a sewage treatment plant in Libya. Without the provision, the division would have turned in a profit before tax of approximately S$3.0 million, allowing for a second consecutive year of profitability. Naturally, I am disappointed to see red again but I do believe this is a temporary setback. On a positive note, it was very encouraging to see the division win the S$21 million new water recycling plant contract – the first in the UAE – and the S$25 million demineralisation plant contract jointly secured with the Real Estate Solutions Division at the Tembusu Multi-Utilities Complex in Singapore. Both contracts were won against strong global competition.
Despite making hefty provisions for the new township in Libya, the Real Estate Solutions Division did not let us down. Revenue increased to S$295.7 million, rising 61% – a new division record – and was almost entirely driven by our industrial real estate solutions business. Profit before tax increased by 125% to S$37.8 million. The division’s excellent performance was underpinned by major projects for two of the world’s most prestigious brands: IBM and Rolls-Royce. Early in 1Q FY2011, we completed the sale of IBM Singapore Technology Park, the first high-tech manufacturing facility that IBM decided to own outright, globally. During FY2011, we also delivered two facilities for Rolls-Royce at the Seletar Aerospace Park. Both facilities won Green Mark Platinum – a first in the aviation industry.
The Geo-Spatial Technology Division also had a spectacular year, registering record revenue of S$94.7 million, up 27%. Profit before tax grew by the same percentage to S$23.8 million, also a record. This division has consistently delivered and has the potential to continue to do so for the future.
With such a good financial performance, the directors have proposed a final dividend of 2 cents per share and special dividend of 3 cents per share, which I am sure will be warmly received by all shareholders. We have already paid 2 cents in the interim, making the total dividend of 7 cents per share the highest (post-split) since we listed in 1975. This is part of our programme to improve capital management.
In relation to dividends, I would like to share with you an interesting fact. If you had bought our share at the beginning of FY2003, the year we resumed annual dividend payments after a two-year break, you would have purchased your share for 17 cents (post-split). Assuming you held onto your share to date, you would have received a grand total of 28.75 cents in cash dividends over nine years or about 169% of your purchase price. On top of this, your share value would have jumped almost six-fold to about S$1 at present – a very rewarding investment!
FY2012: Fortifying Our Asia Pacific Core
This year’s theme for the annual report is “Fortifying Our Asia Pacific Core”.
Over the past 15 years, we have undertaken projects in many countries – 79 to be exact. We are a global corporation. Two and a half years ago, during the depths of the economic downturn, we began to make a conscious effort to position ourselves for long-term growth in the Asia Pacific, a region that I would call our home ground. It was a strategic move that on hindsight – with the continuing troubles in the US, Europe and now, MENA – seems to have been right.
Firstly, China and India are still hungry for natural resources, gobbling up all the natural resources that the world can offer. Their search for these resources has started off nearer to their countries, in areas such as Australia and South East Asia, and slowly extended out from there. To feed the hunger of China and India, huge investments will need to be made in infrastructure to first extract such resources and then export them. As a Group that is both centred in the Asia Pacific and also with relevant infrastructure expertise, we feel that we are well positioned at the crossroads to make things happen.
Secondly, the Asia Pacific is the fastest growing economic region in the world – both now, as well as for decades to come – with a tremendous amount of growth generated from domestic demand, not just export markets. This domestic demand will create a need for investments in infrastructure, particularly to drive industrial growth. Our infrastructure expertise stretches across the backbone of economic development, from the energy and power industries, to water (a basic requirement for life), industrial parks and infrastructure management systems. We are contributors to the basic building blocks behind the much larger national economy.
How successful have we been in refocusing on the Asia Pacific? In FY2009, during the depths of the economic crisis, under 70% of our new contract wins were in the Asia Pacific. This rose to 71% in FY2010 and then jumped to 76% in FY2011. Clearly, our business development efforts are paying off. Does that mean that we will neglect the rest of the world? No, just that we will deploy more resources to securing good opportunities where the chances of success are greater. Bear in mind that the numbers above do not even reflect our steadily growing Geo-Spatial Technology Division, which derives revenue exclusively from the Asia Pacific.
Our acquisition and investment opportunities are similarly centred in the Asia Pacific. True, our acquisition strategy has met with limited success. At HanKore (formerly known as Bio-Treat), we reduced our investment to S$4 million, while totally withdrawing from a S$150 million investment in the Big Box Project with TT International. However, we continue to explore other opportunities that have appeared with our prudent approach to acquisitions, ensuring that there is a good balance between growth prospects, financial returns and risk management.
On the other hand, our project-specific investments have met with much greater success. We added three new clients, namely Continental Automotive, Hankyu Hanshin and Hawker Pacific to our industrial leasehold portfolio, raising the size to over 84,000 square metres. This portfolio is growing quickly and will contribute to the Group’s recurring income in the long-term, something I would like to see more of. Our medium-term target would be to grow this portfolio to between 200,000 to 300,000 square metres, which will open up our options to unlock more value for you.
Although our order book of S$278 million (as at the end of March 2011 plus new orders secured since then) is not as high as where I would like to ideally see it, we should not forget that there are the S$55 million contract from SDV Logistics and various design-build-and-lease contracts which do not form part of the order book but will contribute to our future revenue and profit anyway. In addition, Geo-Spatial Technology revenue – the bulk of it being recurring in nature – is also not part of our order book.
We will continue to build up and secure new exciting projects in FY2012, and hopefully complete some value-accretive acquisitions and investments. We will stay our course in the Asia Pacific, fortifying our home ground.
A Word of Appreciation
I would like to end off this message by expressing my deepest gratitude to our management and staff around the world, whose efforts continue to propel the Group to new heights. I would also like to extend my thanks to all of our clients, bankers, business associates, suppliers and shareholders for their unwavering support. We look forward to their continued support and good relationships.
Thank you for keeping your faith in us. I hope to meet you at our upcoming Annual General Meeting.
Wong Fong Fui
Chairman & Group Chief Executive Officer |