Straco Corporation Ltd

In my search for value (stocks), one stock/company has been consistently popping up – Straco Corp Ltd.

Why Straco caught my attention

1) The stock price has been hovering near the 52 week low (now not exactly near the lowest though).

2) The company management has been repurchasing their company shares in recent times:

• On 29 Aug 2016, Company has repurchased 119,800 shares at SGD 88,985.13 (read here).
• On 24 Aug 2016, Company has repurchased 50,000 shares at SGD 38,023.23 (read here).
• On 19 Aug 2016, Company has repurchased 50,000 shares at SGD 38,824.57 (read here).
• On 12 Aug 2016, Company has repurchased 50,000 shares at SGD 39,648.2 (read here).

3) Well, in Dec 2015, The Motley Fool pointed out that Straco has the following good attributes (read here):

• A strong balance sheet with more cash than debt currently.
• An average return on equity of at least 12% since 2007 while having more cash than debt.
• A track record of consistent earnings growth since 2007.

After all, according to The Motley Fool, it is one of the 2 Rock-Solid Stocks For 2016.

So yes, it is definitely on my radar.

However, with the US markets at all time high, I wasn’t keen on investing yet or adding more into my portfolio. Well, the same can’t be said for the STI (Straits Times Index). For me, the performance of STI appears range bound (see below chart). It wasn’t too long ago (in June 2016) when the STI was considered as one of Asia’s worst performing indices.

Chart of the Day: The STI is one of Asia’s worst-performing indices (read here)

The correlation between the US markets and the Singapore market is not that clear these days (as compared to decades ago). Well, I can’t help feeling that when the US markets do well, it does not necessarily mean that the Singapore market will do well. However, when the US markets do badly, Singapore market, unfortunately, will do badly as well – head we lose, tail we lose.

I have not been actively buying stocks for months and was, in fact, looking more in terms of dividend yielding stocks (for future buying when prices drop). Straco with a dividend yield of only 2.67% isn’t exactly the kind of income stock I was looking for. I would classify it as a growth stock with potential for capital gains.

Well technically, the dividend yield is 3.33% for 2016 so far, and the yield has been increasing each year since 2007 (see below). More on the dividend payout & payout ratio later.

A brief introduction to Straco Corp Ltd:
Straco is an owner and operator of tourism-related assets in China and Singapore. In China, the company has the Shanghai Ocean Aquarium, Underwater World Xiamen, and Lintong Lixing Cable Car attractions under its umbrella. As for Singapore, Straco had acquired a majority stake in the iconic Singapore Flyer in 2014.

• The Singapore Flyer (“Giant Observation Wheel”), which is the Group’s flagship project in Singapore. Launched in 2008, it is one of the world’s largest Observation Wheels standing at 165m tall. This attraction generated revenue of S$38m in FY15, which represented c.29% of the Group’s revenues for 2015.
• The Shanghai Ocean Aquarium is the Group’s flagship project in China and one of the most popular major attractions in Shanghai, with more than 1m visitors every year. Built at a cost of US$55m, it has a total built-in area of 20,000 sqm that can house up to 21,000 people a day.
• Underwater World Xiamen is another aquatic facility belonging to the Group. It has a capacity of 5.8m litres of water and is home to a wide array of fresh water and marine livestock. It is located on the scenic Gulangyu Island. The bulk of Straco’s revenues are derived from China- based attractions. In 2015, the aquariums collectively contributed S$87m, or about 68% of total FY15 revenue.
• The Lixing cable-car service which is located at the scenic Mount Lishan Xi’an, measures up to 1.5km in length. This project was a pioneer in Western China in building a cable-car service of international standards that offers a spectacular view of the mountain and its surroundings. The cable-car ferries visitors from the base to the mid- level of the mountain where Chao Yuan Ge (“CYG”).
• Straco also owns the development rights to CYG, an integral part of the restoration project for the grand “Hua Qing Palace”. The preliminary development concept for the CYG project showcases the unique culture and architectural features from the Tang Dynasty period through reconstructed replicas of its major buildings.

I view Straco’s business as cyclical – as it is heavily reliant on tourism (which in general is cyclical). When times are bad, the tourism sector tends to be affected negatively. For instance, in 2011, the net income of Straco dropped.

Note: The August 2011 stock markets fall was due to fears of contagion of the European sovereign debt crisis to Spain and Italy, as well as concerns over France’s current AAA rating, concerns over the slow economic growth of the United States and its credit rating being downgraded.

Financial fundamentals
Let’s take a look at Straco financial fundamentals.

Looking at the above figures:

The bad points:

1. In terms of valuation, Price/book ratio is high (>1).
2. Total debt/equity ratio is high at 31.12 while the current ratio at 5.82 is too high. A high current ratio can be a sign of problems in managing working capital. (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses).

The good points:

1. EV/EBITDA is low, at 7.38 (As a rule of thumb, any EV/EBITDA below 10 is the sign of a good value).
2. In terms of Profitability, Profit Margin and Operating margin are high (at 37.23% and 52.9% respectively).
3. Management effectiveness is great. The Return on Equity is a good at 23.89%.
4. Balance sheet wise: With a total cash of SGD124.69M vs total debt of SGD67.9M, thus leaving the company to be within an overall cash position of SGD56.79M.

Not exactly clear cut when evaluating the above. However, its balance sheet appears to be on the strong side while profitability (profit margin / operating margin) & ROE are great. So overall it is not bad.

Moreover as mentioned earlier, the company does have a history of a) An average return on equity of at least 12% since 2007 while having more cash than debt and b) A track record of consistent earnings growth since 2007.

Historical financial performance
Let’s check out its historical financial performance. Although the history does not guarantee the future, however, frankly that is the only fact we have. See below charts (Data from Morningstar).

The revenue, operating income, operating margin, net income and earning per share have all been trending up over the years, except for the sudden drop in operating income and operating margin in 2010 and 2011. It shows how the company’s income and margins can be negatively affected during bad years.

Despite the few years with low income and margins, the company has been increasing the dividend payout over the years, and the payout ratio has been pretty consistent (not too high, always below 45%- which is great).

The free cash flow has been steadily increasing over the years, except for a slight dip in 2011.

In general, ROA, ROE and ROIC has been trending upwards while financial leverage remains stable at low levels. However, in recent years the ROIC and ROA have been trending down slightly.

Another thing to note is that current ratio (which compares a firm’s current assets to its current liabilities) has been pretty erratic. However, it has been trending down through in recent years (see below). Acceptable current ratios vary from industry to industry and are generally between 1.5% and 3% for healthy businesses. If a company’s current ratio is in this range, then it generally indicates good short-term financial strength. Hopefully, it can fall within this range in the coming years.

The financial leverage and debt/equity have been both in the healthy range (eg. low values) over the years.

Looking at the above charts, in general, the fundamentals have been trending up over the years. However, the company is not exactly recession/market crash proof – as can be seen in the sudden drop in operating income and operating margin in 2010 and 2011.

Trailing PEG and Intrinsic Value
Let’s do a quick study on the current share price of SGD 0.75 – via Trailing PEG and Intrinsic Value.

1) Trailing PEG

P/E: 13.23 (Most recent filing from POEMS)
Dividend Yield (%): 2.67 (from POEMS)
5 years EPS compound growth rate: 21.41 (from POEMS)

The trailing PEG will be 13.23/(2.67+21.41) = 0.55. Which is good (below 1).

2) Intrinsic Value

Hence the intrinsic value of Straco Corp Ltd is SGD 2.40.

Given the current stock price of Straco Corp Ltd on 9 Sept 2016 is at SGD 0.75, there is a big margin of safety base on the estimated intrinsic value.

In fact, the current share price is lower than intrinsic value by 69%.

Yes, it would perhaps be a good buy at this moment. However given the cyclical nature of this stock & US markets at all time high, I would want to wait a little while for markets to become depressed to pick this up at a lower price.

Nevertheless, I will be keeping an eye on this stock in the meantime.

I am still in the “building up my war-chest” phase.