Friday, November 24, 2017

Sabana Reit - Update On Strategic Review

I wrote on Sabana just a couple of days ago (Link Here) and wanted to update on their latest announcement.

The update on the strategic review is finally out on Friday morning.

This explains why the share price has been sliding down in the past couple of weeks since they announced their Q3 results, perhaps there are insiders who already knew about the news.

I wanted to summarize the update in a nutshell to give us fellow investors some train of thoughts on what we need to do with this.

1.) Talks with ESR Reits have ended.

This is probably the most concerning news for investors if you are buying on the thesis of a successful review.

We'll probably never know the real reason behind this but it appears neither ESR nor Vibrant Group can reach out to a conclusion on this.

It'll remain to be seen if ESR will reduce its substantial stake in Sabana after this outcome.

2.) Selective Divestment of Properties

The management decides to go via this route of selective divestment of assets that they have.

This route is obviously a lot slower and more difficult, but they'd be able to be selective on the non-performing asset that they want to divest.

After a successful divestment earlier in the year for 218 Pandan Loop for 13.8% premium to the book value of the property, the company now has 20 properties under their radar.

Already, they have identified 6 Woodland Loop as their next selected divestment of choice as they have moved this into the short term property held for divestment in their balance sheet. This property amounted to $12.2m, which would translate into 1.1 cents which would either go into the working capital, repayment of loans, or returned back to the shareholders.

Given that they used the earlier divestment of 218 Pandan Loop to reduce much of their gearing, I suspect they may return the proceeds back to shareholders for this one.

3.) Expiring Master Lease Extended

They have managed to successfully renewed the expiring master leases for the 3 Sponsor linked properties (51 Penjuru, 33&35 Penjuru and 18 Gul Drive) on a one year term for an aggregate rental of about $8.8m. This is about what they are getting in terms of the rentals right now.

4.) Step Up Search for new Management and Appoint New ID

With the unsuccessful talks with ESR, this means it is business back to usual and they will need to search for a new CEO after Kevin will leave at the end of this year.

They have also appointed more Independent Directors to replace the old few who has resigned and it seems after the history saga, we may see a clean state of new board members in the company for 2018.

Final Thought

I think given that the news is out public, we may potentially see an overhang in the share price in the short term.

There are obviously people like me who buys into this on the thesis of hoping the strategic review that will work out in favor and there are another group of people who are buying this for dividend purpose.

I think valuation of the company at 0.76x P/BV and a near 8% dividend yield is about rather fair for such industrial sectors. The key for this really if you are holding for longer term is to hope for the new management to rebuild the trust of the public back and increase the value of the shareholders by doing their job well. It's not all done and dusted of course and we need to give them time to prove their worth over time. So this can be a successful investment pending this outcome.

To divest or keep, it depends on your objective ultimately on why you are buying this company in the first place.

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Wednesday, November 22, 2017

Recent Action - Sabana Reit

The recent downtrend of the company puts me into the buying radar zone and I managed to purchase 230,000 shares of the company today at a share price of $0.415.

This purchase immediately made this into my top 3 holdings.

You might have recalled that earlier in the year I managed to purchase this at a lower discount at 34 cents (Link Here) when there is still all the ongoing saga about the revolt of the management, and since then a lot of things have happened.

This is a special play situation.

My main thesis of buying into this stems from the fact that E-Shang Redwood (ESR) has now emerged into a substantial shareholder with more than 5% stake.

And of course I think valuation came to an attractive level too.

Do note that ESR currently holds 80% stake in the formerly known Cambridge Industrial Trust and Warburg (largest shareholder of ESR) has a plan to grow and consolidate their industrial properties into one, most notable injection into the currently known ESR Reit.

While the strategic review is still ongoing and we are kept waiting for the outcome, I feel the recent downtrend of the share price presents a solid opportunity for investors to enter.

First, the current price represents a 33% discount to the nav of 56 cents (based on latest quarterly results). Given that ESR is a substantial shareholder for both Sabana and ESR Reit, the buyout would be considered a related party transactions. In order for that to take place under the arm's length agreement which is usually a lot more stringent, the buyout would have to minimally be offered at least to the nav price. That to me tilts the rewards highly in the favor of those who are vested at this valuation.

If there are anything to add, the last divestment of the properties they made at 218 Pandan Loop was transacted at 13.8% higher than the book value of the properties. 

Second, the fact that ESR holds a substantial shareholder stake in Sabana is also a strategic move for the fact that they are able to call for management to convene an EGM. If they are not a substantial shareholder, it would be a lot harder for them to do that. There is a purpose for them to become a substantial shareholder with an agenda.

Third, there are many similarities in the shareholder profile with Sabana and ESR, with Tong JinQuan being one of those who holds both substantial stake. That makes it easier for ESR to convince key stakeholders for a buyout offer.

Fourth, from a technical point of view, we see a much stronger support based on $0.415 while volume sell today is winding down. The next best support would have been at 34 cents (the price I originally bought).

Fifth, the gearing of the company has since reduced from the earlier of 42% to the current of 36%, which means in terms of gearing debtroom, they are able to take more loan to fund the next property purchase, which I deemed unlikely at this point because I feel they would sell the assets.

Sixth, the current share price is trading at an 8% yield. What this means is for as long as the strategic review is not concluded, we would be sitting with a 8% yield while waiting.

Seventh, while 4 of the master leases are expiring this year, 3 of them are coming from sponsor related, so the risk is virtually much lower.

Point 5 to 7 are not something I am after too much at this point so it's a relatively consolation factor for me.

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Sunday, November 19, 2017

Factor Based Investing Course (by Dr. Wealth) - Review

I had the opportunity to attend Dr. Wealth 2.5 days course which spans across the weekend thanks to the invitation by the team.

This was my second time attending their courses and it is a very much expanded and improvised course than the first one I attended, which touches only on the CNAV (Conservative Net Asset Value) concept. You may want to read my earlier review on the course here.

I'll try to cover as much as I can without detailing too much of what they teach because I believe if you want to become a successful investor, you've got to put an effort to it, not a spoonfeeding and that's what this course is all about.

The course is divided into 3 broad strategies in general, namely the CNAV concept, the GPAD concept and lastly the momentum concept.

Day 1

On day 1, we were taught on how to value a company using a CNAV concept.

This is basically using book value as a core to identify companies who has assets and are trading lower than their book value, which implies as undervalued.

What is different with this CNAV concept is that they teach you on how to pick the good and better assets from the other assets. For example, cash is a better asset than receivables and hence have to be valued a bit more differently because receivables can turn into bad debt in a likely scenario.

Once the list of companies has passed the CNAV criteria, they are being further checked for their other factors, which they named it in house as their POF score. The POF score is basically standing for the Profitability, Operating Efficiency Cashflow and Financial Leverage. The idea of doing this is to ensure that we are buying a legitimate company who is not making losses after losses which are burning cash. If they do, that'll only be a value trap, not a value buy.

The course teaches the students a clear signal of when to enter (buy) and to exit (sell). So they've made it into a system that's easy for the students to follow.

Personally, I like the strategy of the CNAV concept and I have used a bit of the same strategy in general to mostly my developer companies, with the caveat difference that I am looking for a bit of extra catalyst or events driven news before I enter. One such example is Ho Bee Land which I am currently vested.

For the exit strategy, it is always more of an art than science.

Personally, I have different strategy myself but so does everyone and I understand how difficult it can be to design a system where it signals you when to exactly sell at an optimum price.

Day 2

On day 2, we were taught a new strategy in the form of GPAD.

I do not want to delve too much into the detail but this is rather new to me and I've hardly heard about combining the two ratios together between Gross Profit and Dividend. 

Apparently, this was backed by a research study by Novy Marx who's done a quantitative research based on past data in search for ratios which would synergized into a value metrics.

There are several reasons on why the Gross Profit was used instead and they are not much different from what I had written in the past about Bruce Greenwald's EPV (Earnings Power Valuation) method which adds back certain "good" expenses such as marketing and R&D because it takes into account future benefits.

Alvin further teaches the class on how to read companies that are able to sustain their dividend through the free cash flow and payout ratio which adds more value in the form of education.

While it is great to know, I'm just not sure how much these students can absorb because it's a bit more abstract and relative, not as direct as the CNAV concept taught on the first day. I get the feel that the students are taking the 2nd day a lot tougher than the first.

The class also played an investing game which touches on real life example of companies using the CNAV and GPAD concept, which I think everyone enjoyed it.

Day 3

While I'm not able to join the third day due to other appointments, I understand that there is another form of strategy in the momentum concept.

I'm still not sure why they introduce the momentum concept after a rather heavy two strategies which  think it's sufficient for the students to succeed. The momentum concept is relatively short term and hinges much on momentum flow hot money is flowing. In my opinion, this can be seen a bit more speculative rather than investing, and I personally would avoid this altogether if I know nuts about it.

What I like is they have also touched on risk management, portfolio allocation as well on how to mitigate risk using stop loss and orders.

Final Thoughts

I think overall it's a very fruitful 2.5 days if you would like to learn about the different strategies and what value investing is all about.

Personally, I learned a great deal of information myself which would surely be helpful in my future assessment of the companies I prospect.

The class is also conducted in a fun way as Alvin and Louis were both expert in their field of studies and have many real life stories to share. For one, I particularly liked the part where Alvin touches on the vertical and horizontal expansion, using simple example like chicken rice stall where everyone would understand.

If you'd like to explore, you may want to attend their free preview course which you can find over here and signed up in the eventbrite link.

They are free to attend for the preview upon which you can then decide if you'd like to sign up for their extensive 2.5 days course.

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Saturday, November 18, 2017

IFRS 16 - New Leasing Standard

If you are working in an accounting department, you should already be aware that this is one of the next major changes on the new leasing standard that will kick into effect from January 2019. While we still have more than a year to go, many companies are already preparing to shift into the new leasing standard as they start to look into their leasing activities from 2018 onwards to meet the criteria later on. 

The End of the Operating Lease

Under the existing rules, lessees generally account for lease transactions either as an off-balance sheet operating lease or as on balance sheet finance leases. 

The new standard requires the lessees to recognize nearly all leases on the balance sheet in their PPE and then capitalize this by depreciating the items for the remaining useful lives of the assets. 

Who Will Be Affected? 

Many companies uses rentals for their offices or machines as well leasing for access to some machinery or software assets so industries across will be impacted by the new standard. 

Currently, many leases contracts embedded both the operating lease and non-lease (e.g maintenance) components and they do not separate them. Under the new leases standard, it is imperative and mandatory that they separate between the two because the leases will have to be recognized on the balance sheet. 

For example, telco companies that are leasing network equipment or fibre optic cables need to unbundle elements that are between lease, service and maintenance. The discussion will then take place on whether the capacity it provides can outweigh the revenue that they can earn (also subject to the new revenue recognition standard in 2018). 

For the real estate industries, the discussion will then take place on whether lessees are going for shorter term leases rather than longer term and the way they’d like to split between the rentals and the services (inclusive of furniture and fittings). 

What Will Be Exempted?

There are 2 scenarios where the lessees may be exempted from the new IFRS requirement. 

The first is a short lease term that are lower than 12 months. In this case, the lessee is able to recognize the lease payment straight in the PnL over the lease term without needing to touch the balance sheet. 

The second is for lessees that leases for low value assets that are less than $5k. This usually involves components such as laptops, tablets and parts of the assets. 

What This Means In Terms of Financial Impact?

If you owns a company that is impacted by these changes, you should notice a heads up on this. 

The new standard will gross up balance sheets and impact pnl and cashflow. 

Rent expenses will be replaced by depreciation expense in the income statement which results in a front-loaded lease expense. This should translates into lower earnings especially if the depreciation is taken at an accelerated rate. EBITDA would also be virtually higher but NOPAT lower. Operating cashflow should also be higher, since depreciation is a non-cash items but this will be offset with the payment made on the investing cashflow. Balance sheet should also swell, which means gearing may go up.

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Tuesday, November 14, 2017

Dividend Income Updates - Q4 FY2017

With earnings completed this quarter, I can finally tabulate my dividend income for the 4th quarter and also consolidate them for the full year.

I have been reliant on much of my dividend income over the years as it gives about a state of stability and predictability in terms of the cashflow that is much needed in my space so far.

I continue to invest in an arsenal champion of profitable companies who would then declared part of their profits as dividends to reward the shareholders. Having a stake in these companies mean having part of the pie when these companies reap good returns from their business.

I think this year has been a great year for the most part of investors.

Not only do they get to receive dividend income from the businesses they own, but also reap the benefits in terms of better striving business and higher profits, hence translating into higher share price for the shareholders.

Reits in particular have also been very resilient this year and will continue to be for the longer term.

If you are following my portfolio, you'd know that I don't hold a lot of companies on hand. Thus, the 4th quarter is a rather barren month in terms of dividend.

The only company that declares dividend in the 4th quarter is FLT, which pays out sometime in Dec later this year.

CountersAmount ($)Payable Date
FLT1,344.00 19-Dec-17

This brings the reporting for the dividend income for the year comes to an end.

The full year dividend income comes to $26,292, which to me is largely disappointing because I have a goal of achieving a dividend income of above $32,000 for the year. But again, that's because I killed much of my golden goose ahead and have them allocated elsewhere. So perhaps I should see that as a level playing field.

I'll try again next year to see if I can improve anywhere from here.

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Sunday, November 12, 2017

"Nov 17" - SG Transactions & Portfolio Update"

No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
Fraser Logistic Trust
Far East Orchard
Ho Bee Land
Total SGD

We are closing down on the final 2 months of the year and it seems like the market is doing good for everyone, except me :D

As such, it is difficult to keep up with the returns of the market especially if your portfolio does not include the bullish industries alike such as banks, properties, oil and gas or bitcoins.

For this month updates, I initiated a position for Far East Orchard for 20,000 shares at $1.51. I thought it was a decent position as we wait for the company to go back to a net cash position. I last wrote my thoughts on the latest results here. I'm just going to wait for a few development to play out before deciding what to do next.

I also re-initiated a small position in Ho Bee Land for 10,000 shares at $2.51 which I blogged here. The company announced a solid Q3 results which I reviewed here and I am still deciding if I should add to my position in the company.

I also divested my position in First Reit at $1.395 after it hits a high before it went xd a few weeks ago. I just don't feel too comfortable with the current valuation of Reits in general at the moment and there are better options out there so this is more an allocation choice to divest.

I also bought a new position in Straco Corporation for 50,000 shares which I blogged over here. Straco is scheduled to report its results on the 14th Nov so will be one which I am looking forward.

I had also taken a small position in Cosco for 25,000 shares at $0.33 for a speculative position after it announced that it will take Cogent private. Given the recent industries bullishness lead by YZJ and the strong economy bounce back, I took the gamble to test my hypothesis.

Net Worth Portfolio

The portfolio has increased from the previous month of $613,980 to $615,318 this month (+0.2%  month on month; +34.8% year on year).

I guess the from the graph itself it should sum up my whole performance in the second half of the year. After a strong performance in the first half, the second half of the year proves to be extremely disappointing as it failed to follow the general bullishness of the market and is lagging the general market by a long mile. The YTD performance is about on par with the STI index so far, if there's any consolation at all.

I don't think we'll see any surprises as we close the year so it'll be business as usual.

I'll report the year performance once I have concluded them next month.

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Thursday, November 9, 2017

Ho Bee Land - Q3 FY17 Results Review

You might recall I re-initiated a position back in Ho Bee Land just a month ago. You can refer to the earlier post here.

The company announced its Q3 results today after market trading which I thought was pretty good.

The first that was brought to my attention was the recurring income from the rental. Unlike the model of my other vested company FEO, Ho Bee recurring income has steadily increased over the years and we are seeing another quarter of increase from this quarter. Year on year, the recurring income was up 12.4% to $39m in Q3, so if we extrapolate that to 4 full quarters, we should see it reach at around $160m. This was higher than my earlier expectation of $150m which I forecast when I bought earlier. It could be well due to the favorable pounds exchange rate in recent times.

There was nothing much to shout for the sale of the development properties. Much of the Aussie project for The Pearl in Melbourne and Rhapsody in Goldcoast have been recognized so this quarter was not much different.

There's no mention of any sales from its Sentosa project.

The biggest impact that came out of this quarter is the contribution from the joint venture project in Shanghai and Tangshan.

What was once an incident that I have much concern in the past turned out well at the end, given the recent bullishness in the China market. The company managed to book in profits from associates and JV combined of $31m this quarter, a huge boost to its earnings.

What made it better was that the associates declared a dividend which was well received in this quarter under the investing cashflow. The company used it to repay some of its borrowings and cash balance was boosted significantly.

As of Sep 17, net gearing for the company has reduced to 0.3x. 

NAV has increased to $4.55 as compared to $4.39 in previous year.

The company has no next available project that I am aware of that will need the cash, hence I trust that the company will move for another acquisition in UK shortly, which seems to be Chua's favorite playground right now.

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Monday, November 6, 2017

Far East Orchard - Q3 FY17 Results Review

FEO just announced its Q3 results and I thought it was much expected from what many had thought to be a disappointment, especially if we compare them direct across year on year.

From the results, it also proves that FEO is far from reaching its status of being a hotel operator with much recurring income and that the company needs to be treated more as a developer with lumpy earnings. Many of the assets sitting in their book have not yet contributed to earnings, with completion such as the UK accommodation and Joint Venture project with Toga still ongoing. Hence, ROA is low if we look at how much the assets are generating relative to the earnings.

Hospitality revenues would come in at around $150m for full year and a net profit of around $12m. That's far from being able to sustain the 6 cents dividends they've been paying.

Based on the Q3 results, we continue to see similar decline in nature in sales due to the agreements in NZ and AU as well as the lower contribution from Perth and Brisbane. Echoing other companies results, it appears that only Sydney is prospering with growth at the moment. Almost everywhere else are saddled with supply issues and a lower revpar.

Shares of profits from the contributions of Rivertree Residences have tapered from this quarter since the progressive recognition of profits are about to almost complete, hence this resulted in a lower earnings. It is important to note though that the company received most of the repayment back from its JV from these sales hence cashflow has increased considerably. The company's stake of 30% in the projects yield them around $40m in cashflow, which translates to about 9 cents.

As at 30 Sep 2017, the company has a cash equivalent of $211m and a borrowing of $210m, so the company has gone back to a net cash position this quarter.

We are still seeing the company engaging on a few near term projects such as the development project for Woods Square, the mixed retail/residential project with Toga on the Harbourfront Balmain as well as the residential project in UK which is still in the infant stage, hence cashflow will be strained and will likely go back into net debt in the next 1 year or so until the Balmain repayment is completed. Since the arrangement is with an investment in JV, it is unlikely they will see the cashflow until at the very end when all are completed or when the JV decide to declare a dividend.

In terms of balance sheet, they have been revaluing their properties so their nav should be pretty much to date and I just suspect the share price might just continue to languish slow until the company is able to go back convincingly to a net cash position once again.

I'll continue to monitor meanwhile.

Vested with 20,000 shares.

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Saturday, November 4, 2017

The Fine Art of Reverse Budgeting

I thought I was the only weird one doing this until I read an article by Dave Ramsay and confirmed its existence.

I hardly come across people who are doing this in the same way I do, so if you are on the same wavelength with me, give me a high five.

Traditional Saving Method

If you go to a personal finance seminar, you'd tend to find advice that tells you to be frugal, save as much savings as possible to a large extent and then invest the rest.

In that very order.

When I was only starting out wanting to build up capital aggressively, I'd do the same in that order.

Many people budget traditionally by keeping a tab on their day to day expenses and consolidating them with an apps to enable them to track them religiously each month knowing how much you've actually spent in that month.

The idea with doing it this way is you keep focused on each and everything that you've spend under that category and you've become so accustomed to being frugal in your lifestyle that you basically know who you are and what you need.

I think this serves a very good way to track if you are a beginner at saving and would like to see where your expenses go to. However, once you are so accustomed to your frugal lifestyle, there is little point in doing this anymore.

Reverse Budgeting

Reverse budgeting is a concept that I've never thought I would come across but it has suited me rather well in the past three years.

Now, I am not saying that the traditional method of budgeting is bad. Contrary, I think it serves different purpose to different group of people going for different objective. It is important to acknowledge that.

What I did differently with this concept basically is to allocate and tag a fixed percentage of expenses to my income. For instance, if I earn an income of $10,000 a month (hypothetically) and wanted to target a 20% savings rate, then my bucket for expenses would have a budget of $8,000. What I did next is to allocate the primary expenses to these first bucket of budget. These primary expenses such as mortgage loan, groceries, utilities, maid salary, bills are the MUST expenses that I have to incur. The rest would go to the second bucket under discretionary expenses.

Assuming my primary expenses for that month is $5k and discretionary expenses coming in at $2k, I would still have the leftover of that $1k to allocate.

The good thing about this approach is that you can then force yourself to find activities that will increase the value of your life by the need to spend. Now, this may sound weird because every financial experts will tell you to invest that leftover but in my case, I would use that to increase the value of my lifestyle.

Do note that the key is increasing the value of the lifestyle so this is not about spending it recklessly, whichever how you define it. This can be as simple as giving a treat to your subordinate that you feel she deserves or a gift that your spouse has always been eyeing that for. This can also be a travel with your family or extended family member or a dinner meet-up with friends whom you think is important. For instance, in my recent case, I had decided to spend on tickets for Jacky Cheung concerts which my parents have been eyeing for the longest time. I can do this because my budget allows these discretionary expenses.

Whatever it is, you forced yourself hard into thinking ways how to improve your lifestyle. If you have been doing that already, then it's great, but if not, it helps you to achieve a greater lifestyle in a discretionary manner.

You don't necessarily have to spend to increase the value of your lifestyle but having that extra money makes things easier, at least in my case.

Step 1 - Allocate a savings percentage rate that you would like to achieve.
Step 2 - Deduct the MUST primary expenses to the first bucket of expenses.
Step 3 - The rest goes under discretionary expenses and you are free to spend!
Step 4 - Find an activity that increases the value of your life with the rest of the budget you have.

For every good thing, I feel it is important to also highlight the downside.

The downside with this approach is you would need to be flexible with adjusting your discretionary lifestyle. Many times, we take things for granted that we become inflexible in adjusting.

For instance, if you suddenly found yourself being retrenched or taking a paycut to say $8k a month, then using the same 20% savings rate that you set, you'd also need to adjust down your budget and subsequently your discretionary expenses. Remember, the primary expenses are mostly there to stay so the only variable you can play here is adjusting your lifestyle and this can be difficult to some.

Still, I think if you are disciplined at the start by being able to allocate things appropriately to the budget, I think you are considered a discipline person. Otherwise, you are going to be screwed nevertheless.

Final Thoughts

It is important to realize that there is no one fixed for all method in budgeting. 

There are many ways that you can explore and see which that would align with your objectives.

What came out for me with this reversing method that I use is that I am still able to save a decent percentage for my income (in this case 20%), build up my emergency, invest the rest and still grow my wealth in the right direction. Most importantly, I had also increase the value of my lifestyle and am much happier this way.

This is just a personal sharing which may or may not suit everyone's needs.

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Wednesday, November 1, 2017

Recent Action - Straco Corporation

I initiated a position in Straco Corporation recently at a share price of $0.855 for 50,000 shares.

I don't think I have to introduce this company much more. We all know they've been returning incredible shareholder's value since its inception in 2004 and it was only after around 2014 that the share price remains rather flat until today.

For me, I am treating this more of a momentum play given that organic growth is back on track and debts remain lowest since they acquire the Flyer back in 2014. I still want to see the company generating double digit growth either through organic or M&A and the latter remains to be questionable given the past 3 years have been a lackluster performance in terms of share price since they bought the flyer.

In the 2nd quarter of 2017, we see visitors to the attractions up by 8.3%, which highly impacted the better performance of the SOA, LCC and Flyer through increase in revenue by 8.4%. UWX was the only exception as it reported lower sales.

Assuming growth is back on track, we should see similar growth in the Q3 and Q4 and EPS for the year should comes in at about 4.70 cents. Assuming share price is at 85.5 cents, this translates to about 18x earnings. It's just about fair given industry average for tourism sector is at 20x. I don't think there's much to shout at.

The company generally generates around $40m to $60m cashflow on average depending on working capital situation.

They have been consistently reducing their debts from the purchase of the flyer by repaying around $12m to $20m every year on average through their operating cashflow, while using the other $20m to pay dividends. Any retained earnings will go back to their cash in the balance sheet.

The company currently has about $56m worth of debts in their book (net cash: $104m) and cash of $160m. So they can essentially be debt free in the next 3 years or faster if they are more aggressive in repaying the debts.

The company generates tons of free cash flow through their model.

Asset Lease Concession

The asset concession is one to watch out for.

The flyer, for example, is a 30 years asset on lease concession that commences on July 2005. The initial cost to build the flyer is $240m and Straco bought it in 2014 for $140m with 19 years lease left (90% stake).

Today, they are generating a revenue of about $40m and an operating profit of about $10m a year.

The asset is capitalized throughout the useful life of the asset (35 years and 7 months) based on about $8m a year. Adding this back and deducting capex assuming at $1.5m (based on AR) every year, the company would generate a cashflow of about $16.5m a year from this asset. If we multiple back the $16.5m throughout the 19 years, this would sum up to about $313m. This would translate to about 9.1% IRR ($313m - $140m) / 19 years which I thought was pretty decent. This though, only takes up 1/3 of the overall assets they own (~$40m/$120m revenue)

The other 2/3 makes up of mainly SOA and UWX, both of which are flagship assets of the company.

For SOA, the agreement for the incumbent land use right is a period of 40 years concession from 1997 to 2037. That means we essentially have about 20 years left as of today. For UWX, the agreement for the incumbent is also a period of 40 years concession from 1994 to 2034, translating to about 17 years left.

The company generates a sales of about $82m with a handsome gross profit margin of about 70% at $58m operating profit.

This makes up almost 80% of the overall operating profit segment, so clearly this is one that we should watch out for. Too bad they didn't provide the detailed segmental breakdown any further between SOA and UWX. With tourism gaining traction back in China and the assets have about 17 to 20 years left, Straco can enjoy a lot more years on this. Capex is also in the range of only around $2m a year so if they can keep the overhead down, it's pouring cashflow for them for the next 17 to 20 years. I don't even have to mention the crazy IRR they have on these two investment over the years.

This reminds me of China Merchant Pacific.


I don't think the valuation we are looking today represents crazy compelling value if we look at it from an earnings point of view but if we try to use a discounted cashflow, it does look a bargain. Though, with the model, it depends on what we put in the assumptions. We need to make sure the growth in future years is higher than the WACC that we assign.

Clearly, organic growth can only help that much at this point, that pile of cash will surely be required to boost the company into the next stage of phase. That will be important to the g function in our dcf model.

Straco will report its Q3 on the 14th Nov.

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