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QuestionsCategory: Valuation QuadrantWhich valuation method to use?
CB Wong asked 9 years ago

Boustead Singapore has three core businesses namely Energy-related Engineering, Geo-Spatial Technology and Real Estate Solutions. Half of the revenues comes from Energy-related Engineering and Geo-Spatial Technology and earnings are fairly predictable while the other half of company’s revenue is derived from the Real Estate Solutions earnings which tend to be lumpy. In this respect, when one values this type of company which type of valuation method is recommended?

6 Answers
Rusmin Ang answered 9 years ago

Hi CB,    
Sum of parts valuation is useful for conglomerate companies like Boustead. Each division is valued separately and then the divisions are added together to determine the final valuation. For example, Geo-Spatial Technology with its recurring earnings can be valued using P/E. Real Estate Solutions, mainly consists of industrial property assets and can be valued using P/B. Repeat this logic for the other divisions and add them all up together to determine the final value of Boustead. 

CB Wong replied 9 years ago

Hi Rusmin,For my better understanding pertaining to the method of computation, would appreciate it if you could explain the sum of parts valuation by work examples.Thanks.

Rusmin Ang answered 9 years ago

Hi CB,  
Sure, let’s walk through this example together to better grasp the concept of Sum-of-Parts valuation.   Boustead has four main divisions, namely: Energy-Related Engineering, Geospatial Technology, Real Estate Solutions and Waste Water Engineering. Here is some information (your assistance will be most helpful here) we need to carry out this exercise:

  1. What are the earnings for Geo-Spatial? How much would you value for this division (if it was spun off)? From my understanding, this division has high recurring earnings. You may want to give a premium P/E multiple.
  2. What are the earnings for Energy-Related Engineering? How much would you value this division (again, if it was spun off)? 
  3. What is the net asset (after loans) value of the properties owned under Real-Estate Solutions? And how much would you value them if Boustead were to list them as a REIT?
  4. And how would you value the Waste Water division with its “lumpy” earnings? Just to share from my personal experience, companies with lumpy and uncertain earnings usually trade at low P/Es, sometimes below their net asset value.
  5. And lastly, are there any other noteworthy assets on the balance sheet (cash, cash equivalents, liquid investments, etc.)? 

I will hear your updates (let me know if you need help) and we will derive the final ‘estimated’ value of Boustead together. 

CB Wong answered 9 years ago

Hi Rusmin,
If my understanding is correct, the sum of parts valuation computation work out as follows:-
1. Take the average net profit for the division over the last 5 yrs. based lastest tax rate of 18.3% – $20.3M
EPS for this division 20.3/639.8 = 0.032
Industry P/E range for U.S.Technology ranges 15-19. Assume P/E of 25 for GeoSpatial’s high recurring income.
Projected value for this division = (0.032*25)=0.80
2. Take the average net profit for the division over the last 5 yrs. EPS for this division -$14.5M
EPS for this division 14.5/639.8 = 0.023
Average industry P/E is 20.
Projected value for this division = (0.023*20)=0.46
3. Net asset value of properties for Real Estate Solutions=(30.4+105.9)-(46.7+6.7)=82.9 since no clear breakdown of loans for property financing, for conservative computation total bank loans and OD are used to net off from the total property value.
EPS for this division 82.9/639.8 = 0.13
Average Industrial Reits P/B = 1.1
Projected value for this division = 0.13*1.1=0.14
4. Wastewater Engineering has been able to stayed in the black for the last three years so I will just take the average net profit for 3 yrs. instead of 5 yrs. based lastest tax rate of 18.3% – $0.7M
EPS for this division 0.7/639.8 = 0.001
The value for this division is insignificant, assign zero value for this division.
5. Total Cash & cash equivalent, available for sale investments(current & non-current)=(219.3+8.4+69.4)=297.1
EPS for this division 297.1/639.8 = 0.46
Hence sum of parts valuation= (0.80+0.46+0.14+0.46)=1.86
(The above financial figures are extracted from FY2014 Annual Report)

Rusmin Ang answered 9 years ago

Very impressive, CB! You got the concept right :)    
The value you derived is estimated at $1.86. By comparing to the current share price of $1.81, do you think it is a bargain now? Not forgetting the consistent dividend yield offered by the company.     
A minor comment for point: EPS should be NAV instead :)

CB Wong answered 9 years ago

Hi Rusmin, Taken note of the error on item 3, Thanks. I don’t is a bargain at current level even if we take into consideration dividend is current about 3.9% at current price and if add another 0.06 to the projected value of the Real Estate Solution after taken into consideration 20% discount RNAV of the Investment Properties (179). The safety of margin is small, I think a 10% decline from current price will be a bargain but it is a hold if one has already bought into the shares taken into consideration the consistent good performance with 10Yr CAGR of 9% on group revenue and 10-Yr of 17% on group net profit. What’s your take on this?

Rusmin Ang answered 9 years ago

Hi CB,    
I share a similar view as yours that, at this current price, it is definitely not a bargain. Yet there are always trades transacted everyday involving many buyers/sellers exchanging stocks at certain prices. Clearly, the buyers may see Boustead as a bargain and think the share price would continue to go up which leads them to buying the shares. While the sellers may see Boustead as having fully realised its intrinsic value and sell. And the rest (including me) just watch the show. lol    
Now, you can see a very broad perspective here… valuation is subjective from one person to another.