Description

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.

Disclosure

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.

Risks

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.

Catalyst

A few years in the future the property portfolio may be contributed to a REIT.