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Boustead invests in manganese miner, looks to develop Indon coal-mining facilities

Wong Fong Fui, CEO of Boustead Singapore, has spent years scouring the world for a suitable opportunity to steer his company into the booming commodities sector. Now, he appears to have found what he has been looking for - on the other side of his garden fence. Last month, Boustead Singapore said it would invest A$17.5 million ($23.3 million) in OM Holdings, an Australian Securities Exchange-listed company controlled by Low Ngee Tong, who has been Wongs next-door neighbour for more than 10 years. OM Holdings is the third largest producer of manganese in Australia, and Boustead Singapore will own 8.6% of the enlarged company after acquiring 50 million new shares priced at 35 Australian cents each. The sale of shares to Boustead Singapore was part of a placement of 75 million shares by OM Holdings to raise some A$23 million, which will be used to help finance a new manganese smelter it is building in the East Malaysian state of Sarawak. Wong tells The Edge Singapore he was not easily persuaded to make the investment in OM Holdings. For one thing, he had lost a lot of money investing in junior mining stocks in Australia back in the 1980s. All become waste paper, he says of the shares he had bought. Wong also confesses to not being all that impressed with Lows business when he first met him. I asked myself, A Singaporean doing mining in Australia? Singapore doesnt have a natural environment for mining, he says. I thought, What a joke! Over time, however, Wong realised that his neighbour was building a company with a lot of potential, and he started helping Low expand his

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business contacts. In 2008, Low asked Wong to become a director of OM Holdings, a position he held until last December. Now, Wong is convinced that OM Holdings is an investment that Boustead simply cannot pass up. Hes my neighbour. Hes real. I know his character, Wong gushes, referring to Low. He has domain knowledge. Hes been trading, mining and smelting manganese all his life. I dont think anyone in the region has this knowledge. So, if I want to be in resources, I cant miss this opportunity. Yet, there are significant risks. The ferro-alloy smelter that OM Holdings is building in Sarawak is expected to cost US$502 million ($629 million). Even with Bursa Malaysia listed Cahya Mata Sarawak as a 20% investor inthe project, that is a hefty investment for OM Holdings, which has a market capitalisation of only A$176 million and is projected to report a loss A$12 million for FY2011. Moreover, manganese prices have been falling since June 2010. That could result inlosses on OM Holdings inventory of the commodity, which is used in the production of steel and as an alloying agent for aluminium. I am mindful of the risks, but [Low] has a vision for the smelter, Wong says. In Sarawak, there is no environmental issue because they need these kinds of projects to support the Bakun hydroelectric power project. You get tax breaks and power is cheap. That is a tremendous cost advantage. Wong also plays down the possibility of delays in the construction of supporting infrastructure such as roads and ports inthe area. The way he sees it, the Malaysian governments track record on infrastructure building has been reasonably good.In any case, OM Holdings could build its own jetty and conveyor belt system to unload manganese ores shipped form its mines, if there are delays in the building of a port,he adds. Whatever the case, Wong expects Boustead Singapores investment in OM Holdings to pay off only after about five years. Meanwhile, Boustead Singapore could benefit from engineering work from the smelter project. Already, Wong has recommended that one of his directors, who is a civil

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engineer, work with OM Holdings to design the smelter. He also sees Boustead Singapore budding for engineering jobs at the smelter soon. I am going to give the other bidders a run for their money, he says. In the longer term, Boustead Singapore has more than enough cash and confidence to increase its stake in OM Holdings if the opportunity arises, perhaps eventually making it an associate company that contributes to Boustead Singapores bottom line instead of being just an investment, according to Wong. Our cash flow after tax is minimum $40 million every year. Even if we buy 20% of OM Holdings, that is only one years cash flow, and we are sitting on so much cash, he says. Company officials say its net operating cash flow and free cash flow have been at least $40 million in the past six years, except for FY 2009, when the free cash flow was $39.2 million. OM Holdings plans to become on eof the worlds top three independant integrated manganese producers. Its Bootu Creek Mine in Australias Northern Terriory produced 902,000 tonnes of ore last year. OM Holdings also owns a 13% stake in the Tshipi Borwa mine in South Africa, a region known to be rich in manganese. The company holds exclusive marketing rights to some 2.4 million tonnes of manganese a year from the Tshipi mine, which is scheduled to come into production in 2HFY2012.

Deep-value play
Boustead Singapore operates a collectioin of disparate and far-flung businesses that are not easy to grasp. Broadly, they relate to four seperate industries. First, it has an energy-related engineering division that constructs boilers and heaters for the oil and gas sector. According to Standard Chartered, its subsidiary Boustead International Heaters is one of the top five engineering houses for process heaters used in the distillation process. Second, the company has a real estate division that constructs industrial buildings. Among its developments are the recently opened Rolls Royce

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factory in Seletar Aerospace Park, and the Kerry Logistics facility that is being built in Tampines Logispark. The company also owns 64,000 sq m of industrial properties for rent. In addition, Boustead Singapore has a water treatment business, with projects in the United Arab Emirates and Singapore. And, finally, the company is the exclusive distributor for ESRI, the global leader in geographic information systems and location intelligence solutions, in Australia, Singapore, Malaysia, Indonesia, Brunei, Bangladesh and Timor-Leste. For 3QFY2012 (the company has a March year-end), Boustead Singapore reported a 58% decline in earnings to $5.5 million, on a 25% fall in revenue to $95.3 million. For 9MFY2012, earnings were down 57% to $23.2 million, on a 39% decline in revenue to $276.9 million. The company attributes the decline in revenue for 3QFY2012 and 9MFY2012 to its engineering services division, which was hit by delays in several projects as a result of supply-chain disruptions as a result of floods in Thailand. The fall was partly mitigated by an increase in revenue from the Geo-Spatial Technology unit. The companys bottom line was also lower because of the absence of gains from property sales that boosted its earnings a year ago. Singapores earnings would still have declined 27% in 3QFY2012 and 28% in 9MFY2012. Despite its erratic earnings, some analysts like Boustead Singapore because of its solid balance sheet. As at end-3QFY2012, the company had a net cash position of $152.6 million. It also held some $32.7 million in liquid investments consisting largely of high-grade corporate bonds. Stephen Hui, an analyst at Standard Chartered, says in a Feb 1 research report that shares in Boustead Singapore are a deep value play. By his estimates, the value of the companys cash and industrial real estate holdings alone amount to 52% of its market capitalisation. If the group were to be broken up and sold, it could fetch as much as $1.62 a share, or 87%

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more than the current market price its shares, according to Huis report. Standard Chartered ha an overweight rating on Boustead Singapore with a price target of $1.26. Our price target is based on sum-of-the-parts and is highly conservative as we factored in a 40% stock -market discount to Bousteads cash and industrial property, Hui says in his report. Yeak Chee Keong, an analyst at Maybank Kim Eng, is similarily bullish on Boustead Singapore. He says if the value of the companys cash holdings were stripped from its market value, the stock would be trading at just 4.8 times forecast earnings for FY2013. Maybank Kim Eng has a buy recommendation on the stock, with a price target of $1.18. Yeak points out, however, that the companys 9MFY2012 earnings made up only 55% of his full year forecast for FY2012. And, while its order book looks healthy, he expects no major contract wins in the 4QFY2012. He has cut his earnings forecast for FY2012 by 3% to $34.2 mil and by 19% to $59.4 million for FY2013. According to the company, its order book stood at $300 million as at end-3QFY2012, which is lower than the $335 million as at end2QFY2012/

Hunting for investments

With its large cash holdings, Boustead Singapore is constantly on the lookout for investments. Notably, the company has been trying to expand its investment property portfolio, to boost its recurring income. These are industrial properties it designed and built for clients, and then leased to them on a 10 year term. Keith Chu, vice-president for corporate marketing and investor relations at Boustead Singapore, says the company might eventually unlock the value of these assets by creating a real estate investment trust. That would enable the company to recover the capital it has invested in the properties while still earning management fees. Chu says that could happen only when the portfolio reaches 200,000 to 300,000 sqm, though.

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The company has a portfolio of six completed leasehold properties with a total gross floor area (GFA) of 64,152 sq m. Another three are expected to be completed in 2012, which would take its total GFA to 90,000 sq m. Apart from expanding its property holdings, Boustead Singapore has also tried to invest in distressed assets. In 2010, it proposed an investment of $42 million in convertible bonds that would have given it a 20% stake in troubled wastewater treatment company Bio-Treat Technology, which has since been renamed Hankore Technologies. After due diligence, however, Boustead Singapore decided to scale back its investment to just $4 million. That year, Boustead Singapore also looked at a deal to finance and complete construction of electronics goods maker TT Internationals Big Box warehouse and retail complex in Jurong. However, it eventually aborted the transaction. Maybank Kim Engs Yeak says Boustead Singapore has deliberately taken its time in finding new assets that fit with its current businesses. Some people think their business is messy. he says. Its difficult to understand. So they wouldnt want to make it worse. Is the purchase of a signficant stake in OM Holdings a good move? Yeak says the price Boustead Singapore is paying is just 0.5 to 0.6 times OM Holdings book value. Its a small part of their cash, anyway. Its better than sitting on cash and getting nothing out of it. Its a safe investment. Yeak adds that Boustead Singapores CEO is not one for rash investments. Wong is usually quite conservative. Thats why they pulled out of Big Box and scaled back their investment in Bio-treat

Indonesia Next
Wong, 68, started his career as a chemicalengineer at oil company Esso, but dreams of becoming a millionaire led him to Indonesia, where he set up his own chemical-engineering business. He found it tough doing business in Indonesia but, eight years later, when he was 40, he had exceeded the target he set for himself. With more than a couple of million dollars to his name, he retired for two years before bore-dom drove him back to work. Through business associates, he found himself in the food business, running

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Sunshine Allied and, later, QAF. In 1996, he acquired control of Boustead and turned it into his own corporate vehicle. Wong is showing no signs of slowing down yet. He travels extensively, plays golf frequently and walks for an hour evey morning. Every body asks me when i will retire. I am thinking Ill do a big project and then I will retire, he laughs. Yet, he is not jokingabout expanding Boustead Singapore on a new front. Wong says Boustead Singapore is now moving into building facilities such as jetties and roads for small coal mines in Indonesia that do not have economies of scale or capital to build their own facilities. He is open to Boustead Singapores doing a turnkey project on behalf of a mining company or owning the facilities itself. We have been looking for a project for fiver years, he says. We have a small one on the drawing board. One thing that worries him about moving into this new area is Indonesias legal framework in regards to such assets. Once that becomes clearer, he sees Boustead Singapore moving faster into this new sector. If it is just commercial risk, I dare to take the risks, says Wong. It looks like the companys move into manganese through OM Holdings will not be its last investment.