Straits Trading (SGX:S20) – Multiple Growth Platforms in this Deep Value Play

I hate debt. Mainly because I have seen lots of company collapse due to poor debt management. Straits Trading was one company which I used to avoid due to its low equity to debt and cash to debt ratio. However, looking away from all that, I feel that this is a company with lots of upside if their growth platforms bear fruit.

Company Background

Incorporated in 1887, The Straits Trading Company Limited has stakes in real estate, hospitality, resources and investments that span the Asia Pacific region. Below is a summary of the stakes they own

Straits Real Estate89.5%
ARA Asset Management Limited20.95%
Far East Hospitality Holdings30.0%
Malaysia Smelting Corporation Berhad54.8%
Suntec Reit10.1%
Taken from their 2018 Annual Report

Real Estate

This is their bread and butter. Straits Real Estate, their real estate investment business, have earned themselves a reputation as specialist in value adding their investments in return for high capital gains when they monetise it. Assets under management (AUM) has grown at a 36% CAGR from S$365mn in 2014 to $1.4bn in 2018. They have not shown any signs of slowing down, ST has indicated that they intend to expand their AUM by another S$1bn within 4 years.

Before ARA Asset Management Limited was privatised, it was one of my favourite value stock. An asset light business with tons of free cash flow and an AUM of S$36bn. Since then it has grown by leaps and bounds with an AUM of S$80bn with a target to grow assets to $100bn within 3 years. With a 20.95% stake in this company, investing in Straits Trading is a great way to still be vested in ARA.

They also hold a portfolio of properties worth about S$317mn that are waiting to be monetised and funds to be redeployed to other investment opportunities.

Hospitality

In November 2013, STC formed a 30:70 joint venture, Far East Hospitality Holdings (FEHH), with SGX-listed Far East Orchard. STC injected three hotel properties and 13 management contracts into this joint venture. FEHH currently owns and operates a combined portfolio of 94 properties with over 14,700 rooms across seven countries and 25 cities. FEHH also operates nine hotel brands such as Rendezvous, Oasia, Quincy, Village, Far East Collection, Adina Apartment Hotels and Adina Serviced Apartments, Vibe Hotels, Travelodge Hotels and TFE Hotels Collection. Their target is to double the rooms under management from 14,700 to 30,000 in 2023

Resources

Malaysia Smelting Corporation is the third largest tin mining company in Malaysia and the third largest globally. MSC will be relocating from its current plant in Butterworth to a new facility in Pulau Indah, Port Klang. The new smelter will be using a more efficient smelting process – Top Submerged Lance furnace. It will also boost maximum production capacity by 50% or up to 60,000 tonnes p.a.

Financials

Honestly, I’m not really interested in their rev and profit. This is because it is not really indicative of their future performance and I cannot really value this company based on their income statement. Profit is lumpy due to their business nature. Just to sum it up, their main revenue driver is from their tin smelting business, but most of their profit comes from their real estate business. Here’s a look at their financial performance for the past 5 years.

Taken from 2018 Annual Report

As you can see, their net gearing is quite high. I believe that it has got to do with their aggressive expansion plans and it remains a risk to me.

Breakdown of their recent results – Taken from their 1Q2019 Financial Report

Dividend

Straits Trading pays a dividend of 6 cents per share, about 2.67% dividend yield. Total dividends paid equals to about $24mil looking at their PBIT, I feel that there is potential for an increase. Their dividend and interest income is about $48mil and enough to cover dividend payout. Looking back, they have increased their dividend from 2 cents to 6 cents since 2008.

Balance Sheet

Their current NAV is $3.6. But it feel that it would be more accurate if we value ARA at 5% of its AUM, the same value when it was privatised. 5% of $80bn is about $4bn and with ST’s stake of 20.95%, their stake is worth about $838mil, so my RNAV should be about $4.79.

Outlook

What is so interesting about this company? From the outside it looks like any other real estate investment company with high gearing and a not so attractive dividend yield.

Real Estate

The performance by their real estate business is getting more consistent with its strategy to grow its portfolio of income-accretive assets that have good potential for capital gains. Due to the nature of their business, the profits are lumpy as they can only register bulk of their profits when they monetized their assets. However, if they are able to scale up by expanding their AUM up another $1bn, their profitability will definitely be more consistent as they would have more options and have a larger pool of assets to play with. Furthermore, their track record has shown that they can deliver good results time and again.

ARA is another reason to be excited about, from their plans to IPO again and their immense growth since they delisted. Previously I mentioned that we should roughly value them at 5% equity, so imagine their value when they manage to grow their AUM to $100bn as targeted? (During the Ascendas and Singbridge acquisition by Capitaland, Blackstone used equity to AUM valuations of 4.8%. This was very close to what was ARA was valued at when they were privatised)

Hospitality

I’m not an expert in the hospitality segment. So what I can tell you is from a layman’s point of view. For Singapore, it seems that hotel room demand is expected to grow in accordance to the supply, which is the number of international visitor arrivals. Based on Singapore Tourism Board’s forecast, it is expected to grow. Also, other platforms such as AirBnB are not a threat for now due to our government regulations on rentals of properties.

As for overseas hospitality outlook, I dont believe that things like AirBnB will kill off hotel sector. As people in countries like China become more affluent, they will drive up tourism demand in Europe and Australia, where ST will definitely benefit from.

To me, Far East Orchard and Straits Trading seems like a perfect combo in this segment. One is an established hospitality assets owner and operator and the other is well verse in acquiring strategic assets, unlocking value and then redeploying capital towards other high yielding opportunities. Their hospitality platform looks very scalable as they look to capitalise on opportunities in this area.

Resources

As the third largest tin producer in the world and with a new high tech plant, they are well placed to capture new demand for tin driven by new technologies such as material for catalyst in Lithium batteries for electric vehicles.

There is also the redevelopment of a 40.1 acre mixed development project in Penang with a GDV of roughly RM3bn. Although timeline has not been established for this project, there is alot of potential value for this asset.

Conclusion

Where it all began. Mdm Chew started to lay out her transformation plans in the 2008 Annual Report

“Potential” is the word to describe Straits Trading. Since their transformation started when Tecity acquired a controlling stake in 2008, what they have achieved so far is quite remarkable. They have established their growth platforms and track record in real estate, hospitality and resources. If you have the time, I really recommend all existing and potential shareholders to read their annual reports from 2008 to 2018.

Here is a link to view the reports http://straitstrading.listedcompany.com/publications.html

A timeline of their accomplishments so far – Taken from their 2018 Annual Report

Despite my concerns on their high debt, I am comforted by the fact that they have a recurring income of about $25mn from rentals, dividend and associate income. This is also sufficient to cover my dividend payout. From my RNAV calculations, ST is trading at about 50% discount to their RNAV of $4.79, which is relatively cheap at this price.

After 10 years, their painstaking efforts to build these platforms are starting to bear fruit. I feel that they are well positioned to deliver sustainable results and with a longer term view on this company, I am willing to be patient and see how they convert their potential into results.

The Moss Piglet is vested in Straits Trading at an average price of $2.20

Cheers.

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