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Chairman's Message

Extracted from Boustead FY2016 Annual Report


Dear Fellow Shareholders,

It gives me great pleasure to present to you the Boustead FY2016 Annual Report for the financial year ended 31 March 2016.

FY2016 has been our most challenging year in a decade. Revenue was S$486.7 million, decreasing 13% year–on–year but still above our 10–year annual average. However, profit attributable to you – fellow owners of our Company – was S$28.2 million, decreasing 55% year–and–year and falling to a level last seen in FY2006. To be fair, the sharp decline in net profit was partially due to the absence of major non–recurring items and the demerger of our Real Estate Solutions Division under Boustead Projects. Nearly half of the net profit contributed by Boustead Projects – our largest profit contributor – has been spun off to our shareholders after receiving Boustead Projects' shares as a dividend at the start of FY2016.

Comparing our net profit on an apple–to–apple basis by adding back the profit that had been spun off, our core net profit would have been S$39.2 million instead of S$28.2 million.

FY2016 – Broad–Based Profitability Achieved in Extremely Tough Macroeconomic Conditions

Macroeconomic conditions in FY2016 were extremely tough, akin to a severe storm. Three factors which greatly impacted us were the depressed state of the global oil & gas industries, the harsh business environment affecting Singapore's real estate market and strong global currency headwinds caused by strengthening USD. On a positive note, despite all of these challenges, all three divisions delivered profitability not only for the full–year but also in each individual quarter. We achieved a fifth successive year of broad–based profitability.

At the Energy–Related Engineering Division, it was never going to be easy after last year's record achievements, especially with global oil & gas industries facing their longest price slump in over a decade. Division revenue contracted 33% year–on–year to S$128.0 million, while division profit before income tax ("PBT") fell 73% year–on–year to S$9.1 million. Just like what I had witnessed previously in the global oil & gas industries' last major recession from 1983 to 1997, my personal view is that the current recession will last longer than what has been speculated by analysts in the media. Like before, industry consolidation will take place. Our division's business model which focuses on being asset light, cash flow driven and lean, bodes well for our ability to sail through even a prolonged consolidation period when weaker players are weeded out. In the long run, we will emerge as a stronger competitor than ever before.

For the ninth successive year, our Real Estate Solutions Division (Boustead Projects) was our largest revenue contributor. Boustead Projects was one of only two listings on the SGX Mainboard during the whole of 2015. Division revenue stayed comparable year–on–year at S$255.5 million. Division PBT decreased 11% year–on–year to S$29.7 million but was still reasonable in light of the harsh business environment. Our strategy implemented after the Global Financial Crisis to expand our industrial leasehold portfolio and increase recurring income has proven correct, partially cushioning against pressure on design–and–build margins.

Another year of currency headwinds buffeted our Geo–Spatial Technology Division, sending division revenue down 7% year–on–year to S$103.0 million, while division PBT dropped 12% year–on–year to S$19.9 million. Excluding revenue translation effects, revenue growth would have been present. A brighter future awaits Esri technology which continues to transform the future global economy, one based on intelligent mapping of our world where smart nations, smart cities, big data crunching, and more efficient and effective use of our limited resources become the norm.

Another highlight was our overwhelming victory in our long–running legal battle with Arab Banking Corporation ("ABC") regarding our guarantees for Libya. With the Court of Appeal recently rejecting ABC's appeal and finding ABC to have 'acted fraudulently, in the reckless sense, in making the demand', a permanent injunction is in place against the payment of our US$18.8 million in guarantees. We have been conclusively discharged from these contingent liabilities, saving us from giving away our money unconscionably. The case is finally closed.

Continuing our dividend tradition, your Board proposed a final dividend of 2 cents for your approval. Together with the interim dividend of 1 cent paid, the total ordinary dividend of 3 cents equates to a dividend payout ratio of 57% and a dividend yield of about 4% on our current share price. This is on top of Boustead Projects' shares given as a dividend at the start of FY2016, which equates to 16.2 cents.

Creating a World of Difference

The message that fronts our annual report states, 'Creating a world of difference'. If somebody does something that makes a world of difference, then it means that they make an improvement (the difference) that is truly felt. Creating a world of difference is exactly what we have been doing for 188 years and counting. It is in our Boustead DNA.

Underlying our role as creators of a world of difference are our values – since our beginnings in 1828 – which encompass thinking globally, striving for progress, respecting our employees and stakeholders, keeping an open mind, adhering to the highest standards of ethical and moral conduct, upholding excellence, servicing our clients and prioritising safety. In addition to these values, we have ingrained adaptability to adversity into our mindsets. These form a foundation for our long–term success.

Over time, our values and mindsets have allowed us to exit sunset industries and enter emerging industries at the start of long–term megatrends. There are plenty of examples: soft commodities in 1828, rubber and tin in the 1880s, oil in the 1890s, and managing the world's largest consumer brands and also shipping lines during the 1900s. Our pioneer status and contributions to the respective industries have had a great positive impact on many generations of communities around the world including Singapore.

Today, we are in energy, property and technology. Will it be so 20, 50 or even 100 years down the road? We hope so. However, Charles Darwin's theory of evolution is as applicable to corporations as it is to living species. If a corporation does not evolve, it will likely be made extinct by a stronger, fitter and more agile competitor. There are times when we have to let go of our past glories. It is the same with companies. A highly successful product or service today may not necessarily be successful tomorrow. An unadaptable or stubborn corporation will try its best to hold onto such products and services even when they become irrelevant. The corporations that enjoy longevity do things differently. They evolve. They create a different business and adapt to the prevailing times. Remember, change is the only constant. And in today's context, change produces not only a great deal of opportunities but helps us to survive.

As long as we continue to embrace this, we will continue to be creators of a world of difference.

Our Cash Flow–Driven Business Model


When evaluating how a company performs financially, is total profit the best indicator? Not in my books. A much better indicator is free cash flow generated. A corporation that generates huge paper profit but negative or little free cash flow is just a masquerade; sustainable dividends cannot be paid, acquisitions not made, debts remain unpaid and a bright future is never laid.

Our total profit was S$41.1 million. Our free cash flow was S$110.9 million. In fact, we have averaged annual free cash flow of S$42.8 million over a decade. Our calculation of free cash flow is operating cash flow less our net investments (and net loans where applicable) in our property, plant and equipment, industrial leasehold portfolio and subsidiaries, associates and joint ventures.

The answer to continued free cash flow generation is contained within our business model. A shareholder in Boustead is not a beneficial owner of hard assets such as equipment, machinery and fabrication or manufacturing facilities. Instead, you are a beneficial owner of a renowned brand name that has thrived for 188 years on the basis of our strong values and reputation for credibility, integrity, quality, reliability and trust; in leadership supported by capable global teams who possess intellectual capital including networks, relationships, track records and proprietary and technical knowledge; and a business and idea building platform which comes with an inbuilt reinvention capability. In essence, you are investing in an adaptable and flexible knowledgedriven corporation made up of talented team players.

Our current domain is in design and engineering of specialised niche infrastructure – both physical and digital – to support our global clients' operations and processes. In–house, we take on high value–added activities: design, execution, project management and delivery. Low value–added fabrication and manufacturing activities based on our in–house designs are outsourced to a global network of fabricators. This keeps us lean and contains internal overhead and staff costs. Furthermore, we are able to avoid making heavy capital expenditures just to sustain our business, especially during challenging times like these.

Our cash flow–driven business model places us in a strong position to weather the storm. Our balance sheet is steady with a net cash position of S$165.6 million. This brings us onto my next topic – acquisitions.

FY2017 and Beyond – On Acquisition Quest

In a low interest rate environment like the one of the past seven years, cash is but a lowly servant. However, the low interest rate environment cannot persist forever – as bubbles continue to blow and grow – and once interest rates rise, cash will once again reign as king. I like the way prominent Australian fund manager, Roger Montgomery put it, "Investing for long periods in cash is not desirable. But in the short run cash is like an option over every asset class, with no expiration date and no strike price. Cash provides the option to sweep up a bargain when it becomes available and this must have some value above the fact it earns almost nothing. If the purpose of an investment portfolio is to grow as well as protect the wealth you've accumulated over the years, doesn't it make sense, if you can afford it, to also hold an option?"

That is right, we hold a huge option in our hands, S$259.1 million in total cash to be exact and more than S$35 million in highly liquid assets on our balance sheet. Our total cash and ungeared position offer great flexibility to change course and direction unfettered in this storm. A highly geared corporation can only sail straight into the eye of the storm because at least one hand has been chained, if not two. We, on the other hand, can navigate around the periphery because without gearing, not only are our hands free, our eyes are also free to spot acquisitions and investments which may be floating around.

Let me add a disclaimer though. Acquiring a business is easy. Acquiring a great business is most difficult. It rarely if ever boils down simply to price–to–earnings ratios. It often encapsulates complex evaluations of macroeconomic conditions, industry competitive landscape, branding, business model, barriers to entry, competitive advantages, technical knowledge, risk management and most importantly, people. For years, we have been looking to acquire a business that has ticks in all the right boxes. We also want a business which will survive a long–drawn downturn.

In FY2016, three potential acquisition and investment opportunities came rather close. The first was an announced proposed acquisition of a gas field with proven reserves in Indonesia. Its prospects were exciting and its risks manageable. Unfortunately, we were outbid by a rival. Sometimes, sellers lack integrity and sincere intention to conclude a deal, in this instance, trying to create a bidding war for an asset despite communicating otherwise. We decided not to engage in the bidding war although we certainly had the firepower to do so, as any additional premium paid may have significantly decreased our margin of safety and introduced unnecessary new risks.

The second potential acquisition (not announced) was a target in the energy sector providing engineering services for niche gas–related infrastructure. Thorough due diligence eventually uncovered that people could pose to be the biggest problem.

The third potential investment (also not announced) was a target in the real estate sector, where a cornerstone investor position was opened to us. Interesting as it looked, we pursued no further when detailed information was not forthcoming. Thorough due diligence is extremely important, otherwise we may end up blind–sided and that does not look pretty.

I hope these examples give you some insights into our acquisition and investment philosophy. Where risks cannot be comfortably determined or managed, then forget about the 'blue sky' returns which may be. We may have missed some opportunities in FY2016 but they will come knocking again. In long–term investing, patience is a great virtue that will be rewarded. Just give us time to deploy our huge option so that we can enlarge your long–term benefit. We love fishing in stormy weather.

Succession Planning

In last year's annual report, I spoke at length about succession planning at Boustead Projects. With that well taken care of, half of our Group's revenue has been de–risked.

Succession's importance cannot be understated. No matter how capable the current leadership is or what they have accomplished, if they do not plan for succession to a future generation of capable leaders, then decades of hard work and prosperity can unravel in a matter of years in the hands of the next generation. This is the reason why your Board has taken more than five years to evaluate and appoint my potential successor.

With the Board's recent appointment and endorsement of Wong Yu Loon (my elder son) as Deputy Group Chief Executive Officer, the final pieces to succession are falling into place. Prior to this, Yu Loon had already been Executive Director. He has spent the last 13 years of his career within the Group, understanding the business intricacies of our various divisions. His double degrees in accounting and law, plus chartered financial analyst credentials, years in investment banking and even more years within the Group put him in good stead to support the Group in our wider context. I shall do my utmost to pass my business knowledge onto him and guide him forward for that day when he may potentially succeed me.

Simultaneously, we have taken great efforts to ensure succession at all levels of the Group, with the progressive development of our second–line and thirdline leaders. To enjoy longevity, a company requires leaders and people who possess a high level of AQ – adversity quotient – apart from IQ, EQ and FQ. Essentially, AQ refers to people's ability to manage adversity and if possible, to turn that adversity into an opportunity. AQ will be an important part of continuing assessment of our potential future leaders.

A Word of Appreciation

I would like to express my deepest gratitude to our management and staff around the world for their efforts during these challenging times. I am confident that our leaders and teams have what it takes to help us sail through this storm safely and come out stronger for it. All hands on deck. I would also like to extend my thanks to all our clients, business partners, associates, bankers, suppliers and shareholders foryour continuous support.

Thank you for supporting us. I look forward to seeing you at our upcoming Annual General Meeting.

Wong Fong Fui
Chairman & Group Chief Executive Officer