Monday, December 2, 2019

Recent Action - Straco Corp

I've been very busy and packed in the past recent weeks running on many fronts so I thought I'll just take this chance to quickly write an update on the recent position I took with Straco which I bought at 67.5 cents.

If you'd like to understand the past performance of this company you can refer to this great article from LJY which highlights a lot more details (Link Here)

Straco Corp has reported a rather poor Q3 earlier in November and adding further to the news that the Singapore Flyers broke down once again, the share price has plummeted over the past couple of weeks.

In my opinion, the Singapore Flyer breakdown is more an opportunity for investors than concern in the short term because we know it's likely to operate back in a couple of weeks time (hopefully!) after they have done all the scheduling check. In the long term however, it remains to be seen how many occurrence of breakdown it will continue to happen. Breakdown means suspending operations, which will then put a dent over their topline numbers as the lower number of visitors means it will be a double whammy on the extension podium which will affect the footfall visitors for the restaurants and other attractions nearby.

The Q3 numbers is traditionally the strongest number for Straco and it shows a bigger concern on the overall picture.

The most notable decline is in the number of visitors to the two aquariums (SOA and UWX) which dropped to 1.845m visitors for the quarter, which was a drop of over 8.2% year on year. Q3 is traditionally the peak season for China holidays which means this drop is a strong indication that the China growth is slowing down.

In fact, this slowdown has been felt in the past two quarters where in Q2 visitors number has dropped to 1.085m (from 1.225m the previous Q2 YoY) and Q1 visitors number has dropped to 0.986m (from 1.065m the previous Q1 YoY).

For a company like Straco which positions themselves as a growth company, the decline in the visitors number means a decline in the topline which in turn will hurt the overall bottomline.

From a cashflow point of view, the company is still generating a strong cashflow of between $45m to $60m a year, out of which $30m will go to dividends payout (at 3.5 cents) and another $12m will go to repayment of the debts ($3m repayment every quarter). The company would then retain somewhere between $3m to $10m for their retained earnings.

The balance sheet has also looked stronger as the company continues to hoard more cash and a lower debt with the repayment of the debts every quarter. The latest standing is a net cash of $180m ($209m less 29m), which translates to about 21 cents/share.

If the company continues to pare down the debts at $3m per quarter, it will take them around 10 quarters to be completely debt free.



Asset Lease Concession

The asset lease concession is always something to watch out for in the longer term, though in the short term the declining visitors footfall is a much bigger concern.

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 17 years lease left (90% stake). Today, they are generating a revenue of about $40m and an operating profit of about $10m a year (without breakdown of course!). 

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 17 years, this would sum up to about $280m. This would translate to about 8.2% IRR ($280m - $140m) / 17 years.

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 18 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 15 years left. The company generates a sales of about $82m with a handsome gross profit margin of about 70% at $58m operating profit. 

Conclusions

I reckon the company will continue to pay out 3.5 cents dividends in this coming FY despite the fall in both topline and bottomline just because I think they have too much cash to hoard and they have not found the right opportunity to acquire just yet, though it is something they've mentioned in the AR that it is something they've continuously looked at throughout the year.

The company has also started making buybacks in the past recent weeks/months so we're likely seeing some support in terms of the buybacks.

For a short term play, the re-commencement of the Flyer will bring good news which is likely to drive the share price in the short term, though the long term there are still some questionable numbers in play yet.

Thanks for reading.


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