Straits Trading (SGX:S20) – Value Unlocking Continues but…

Real estate company Straits Trading (SGX:S20) is valued by the company at a 44% discount to its net asset value of $3.66 based on its current share price of $2.07. If based on my RNAV calculation done in my previous post (see here), it would be trading at 43% of RNAV of $4.79.

I decided to revisit this stock to update myself on the recent developments in Straits Trading.

2Q19 Financial Results

Straits Trading reported revenue of $105.3mil in 2Q19 compared to $116.3 in 2Q18, a 9.4% difference. This is due to the lower sales in their tin mining segment but it is offset by a 63.2% increase in property revenue.

Profit came in 20% lower than 2Q18 at $28.9mil. However, if we strip out the fair value changes, it would show a yoy improvement of 6% at $23.3mil and $21.9mil for 2Q19 and 2Q18 respectively.

Generally, I would say that this is a decent set of results. Straits Trading continue to benefit from ARA with higher contributions from them this quarter.

New Developments

Real Estate

South Korea

In June 19, Straits Trading announced that it has partnered with one of South Korea’s largest asset managers IGIS Asset Management to build a portfolio of assets focusing on core logistic assets with an initial commitment of KRW104.2bil (S$120mil) and expected portfolio size of KRW400bil (S$462mil). Their first investment is freehold land which they will develop into a modern 5-storey ramp up logistics facility.

Artist Impression of Asset

Australia

Straits Trading’s strategy in Australia is to seek assets with strong immediate cashflow and value-adding opportunities. They entered into a JV with Commercial and General (C&G) and have a 80% interest in a portfolio of 5 logistics properties with a estimated total value of AUD137.5mil (S$128.3mil).

Source: Straits Trading August 2019 Corporate Presentation

In September 19, they announced that they have acquired a 6th property as part of their expansion plans. The property has a size of 37,958sqm and is 15Km north of Adelaide CBD. It will be developed into a mixed-use office and warehouse facility which is expected to be completed by end 2020.

Japan

In Japan, Straits Trading boost returns by recycling capital from low-yielding assets and investing into assets with higher gains potential.

In FY2018, the company unlocked gains of S$35 million associated with a 47.5% stake in a portfolio of office properties held under Greater Tokyo Office Fund which it bought in June 2015. The divestment proceeds were subsequently reinvested in other properties and assets in Tokyo, Japan.

In line with strategy, Savills IM Japan Residential Fund, which Straits Trading has subscribed shares in, entered into a silent partnership to acquire 2 properties in Tokyo, Japan for JPY3.1bil, of which the fund has committed JPY695mil (S$8.9mil). An interesting point to note is that the purchase was done 18% lower than its valuation, which means that they are already in paper profit when the deal was done.

ARA Asset Management

Straits Trading can expect to benefit from the growth of ARA Asset Management as they target to achieve $100B AUM by 2021 (See source here).

In 2Q19, they achieved 3 milestones where they;

  • Launched its first US upscale select service hospitality trust in SGX
  • Launched Xiamen ARA Qihang Equity Investment Fund, the first of a series of RMB-denominated fund by ARA to invest in the Chinese real estate market.
  • Established a JV with London-based Dunedin Property to invest and manage real estate assets in the UK.

I feel that ARA’s multi-platform, multi-product global fund management business will continue to grow and do well in the long run.

Huge RNAV Discount Could Stay For Much Longer

Even though Straits Trading have been enhancing asset values with their proactive asset management style, I feel that the discount to RNAV could be here for a while. The main reason being that there is no near term catalyst that will cause Straits Trading to re-rate.

Unattractive Dividend Yield

As more investors chase for yields in this uncertain economy, you can be sure that Straits Trading is not at the top of everyone’s list. With a dividend yield of 2.9%, the company might not be highly sought after by income investors.

https://www.dividends.sg/view/S20 : refer to website for more info on their dividend payouts

However, I opined that if you are investing in Straits Trading because of its dividend yield, you will be making a huge mistake. Straits Trading requires to continue to reinvest the proceeds of their assets back into the business and distributing more profit as dividends might not be the best way to allocate their capital.

ARA Asset Management IPO

Source: Straits Trading August 2019 Corporate Presentation

It is widely expected that ARA will go for an IPO, but even if it did, I do not think that it will happen in the near term as they have not achieve their AUM target of $100bil.

Monetization of Legacy Assets

It could significantly take more time to unlock the value of Straits Trading’s assets. For example, the development of its freehold land in Penang would take at least 3 years unless an outright sale is made.

Takeaway

Even though I feel that Straits Trading should trade at a higher discount to its RNAV due to its unique ability to exploit synergies with its REITs, ARA and hotel operator Far East Hospitality, current factors does not seem like it will re-rate in the near term.

Source: Straits Trading August 2019 Corporate Presentation

Investing in Straits Trading requires patience as it transforms itself into an asset light business model. In time to come, I am confident that its strategy and growth drivers will be better appreciated.

Cheers.

The Moss Piglet is vested in Straits Trading at and average price of $2.14.

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