Friday, April 8, 2011

BSTEAD ... Apr11

In March 2011, Boustead Holdings Bhd has inked two deals to buy a healthcare unit and an aviation company. What both these acquired businesses have in common is that each has a 10-year order book. Boustead is seen to have paid reasonable prices for these purchases, which offer recurring income.

But what market observers are hoping for is that Boustead will be a beneficiary in the Government's disposal of two pieces of land 60 acres in Jalan Cochrane and 245 acres in Jalan Ipoh.

Boustead’s major shareholder, Lembaga Tabung Angkatan Tentera (LTAT), was still in discussions with the government over the acquisition of 60 acres of land in Jalan Cochrane and 245 acres in Jalan Ipoh.

That would be a catalyst for a re-rating. Going by Boustead's track record in property development, it would be able to transform the two pieces of land into liveable townships.

Nevertheless Boustead's major shareholder, Lembaga Tabung Angkatan Tentera, which is still in discussions with the Government.

Bstead current focus is very much on the completion of the Pharmaniaga Bhd and MHS Aviation Bhd deals that will swell the Boustead group's income base, though the contribution from MHS will be small.

In October 2010, Boustead announced its purchase of 86.81% in Pharmaniaga, which has a 10-year concession agreement with the Health Ministry to supply medical products to Government-owned hospitals. Boustead expects the transaction to be completed by May 2011.

In late March 2011, Boustead would buy a 51% stake in MHS for RM100mil. MHS has a 10-year contract worth RM3.1bil from Petronas Carigali to provide rotary wing aircraft, equipment and services. The contract comes with a five-year option to extend. Boustead will fund the purchase of MHS via internally generated funds.

The board believes that this contract, which amounts to RM3.1bil, will further ensure the continued revenue from air charter business and utilisation of the aircraft for the benefit of Boustead group.

MHS should start contributing earnings to the group from 2QFY11 onwards, but significant contribution would come after three years.

Following the proposed acquisition, Boustead expected its gearing to rise to 0.84 times from 0.75 times as at Dec 31, 2010, while its borrowings would rise to RM3.55 billion from RM3.16 billion previously after taking into account a refinancing exercise by MHS’ wholly-owned subsidiary, DRIR Assets Sdn Bhd.

MHS was in the midst of commencing negotiations with foreign parties for more contracts, and that while its niche was in the O&G business, it remained open to other business opportunities.

The acquisition of MHS would add value and complement Boustead’s business activities as it is also involved in O&G fabrication through its heavy industries division.

Boustead is 180 years old and has 90 subsidiaries and associate companies. It has six key focus areas: plantations, heavy industries, property, finance and investment, trading and manufacturing and pharmaceutical.

MHS will be parked under its heavy industries division. In the longer term, expect MHS to be a strong contributor to the heavy industries division, with hopefully a contribution within a range of 10% to 15% of the division's profitability.

In 201, the heavy industries division's contribution to the group profit was RM146mil, while Boustead as a whole earned RM537mil in net profit and RM6.18bil in revenues.

The addition of these income streams bodes well for Boustead, which has articulated a formal dividend policy of 70% of net profit.
The rationale for the acquisition is that the air charter services complements Boustead's heavy industries division. After all, the oil and gas sector is booming. They are now going for deep-sea exploration, and for companies like MHS, which are the specialists in air charter services for the oil and gas sector, they stand a chance to be selected to transport people and goods to platforms out in the ocean.

Boustead's 65%-owned Boustead Heavy Industries Corp (BHIC) is one of the seven Petronas-licenced fabricators. It is considered a jewel in the Boustead stable and has a RM1.7bil order book. BHIC builds accommodation vessels and fabricates marine vessels.

Boustead is also involved in the oil and gas sector via Atlas Hall, which is focused on upstream O&G activities via supply of subsea equipment and now via MHS by providing offshore services.

Boustead is also known to get contracts from the Malaysian Army and Navy. With MHS, it can now offer air charter services to its clients.

Apart from the RM3.1bil contract to supply, among others, air charter services to Petronas Carigali, MHS also has a three-year contract with a client in Labuan and another contract in Mauritania.

Some are wondering why it was Boustead, and not BHIC, that bought MHS when the analysts see more synergies between MHS and BHIC. All businesses of this nature are placed under the heavy industries division for strong balance sheet management and efficient reporting. The maritime business is captured under BHIC and the aviation business is currently managed under Boustead.
It is not known if there is a bigger game plan, but MHS seems to be a good fit to the group as Boustead also has a joint venture to set up a maintenance, repair and overhaul (MRO) centre, where it partners Eurocopter. This is to offer MRO services for helicopters in Malaysia. This is where MHS' expertise may be very valuable.

On Boustead’s property division, Lodin said the group was exploring various options to unlock value. The group had not decided which route to inject its properties into a real estate investment trust (REIT) or a possible re-listing of its property arm

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