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Straco Corp’s latest financial performance

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In my previous article, I wrote about Straco Corp‘s company profile and its acquisition of Singapore Flyer back in 2014. This blog post will analyse Straco Corp’s latest financial performance.

On 10 August 2016, Straco Corp reported a 5.2% decline in Group revenue to $27.86 million for the second quarter ended 30 June 2016 compared to 2Q2015. The decline in revenue was due to lower number of visitors for its two aquariums in China. Interestingly, Singapore Flyer reported higher revenue for 2Q2016 on improved ticket yield. Cumulatively, the Group revenue for 1H2016 decreased marginally by 0.5%. Even though there was increased revenue at Singapore Flyer, this was offset by declines at the China aquariums.

Based on the latest earning report, the slow down in China definitely has an impact on Straco Corp’s earning. Below is the 5 year trend of the company’s revenue.

Straco Corp Revenue

Straco Corp Revenue (in millions)

Dividends per share have been increasing for the last four years. However, there are signs that the growth in dividends has reached a plateau. During the quarter, the company paid out dividends of $21.48 million for the financial year ended 31 December 2015. As at 30 June 2016, the Group’s cash and cash equivalent balance amounted to $124.69 million.

Straco Dividends

Dividends (in dollars)

Straco Corp’s cash flow remains healthy and has been increasing for the past four years. The company managed to generated net cash from operating activities despite the economy slow down in China. The company has a net cash of $56.8 million for the second quarter. Thus, barring unforeseen circumstances, it is unlikely that Straco Corp will encounter any cash flow issues for the foreseeable future.

Straco Operating Cash

Cash flows (in millions)

Investment Risk

Straco Corp’s core assets are concentrated in Asia region, namely Singapore and China. The company operates Shanghai Ocean Aquarium, Singapore Flyer, Underwater World Xiamen and Lixing Cable Car. Straco’s headquarter is located in Singapore and most of its business activities are in China. Therefore, its financial performance will be impacted by the foreign exchange movements of these two countries. For example, stronger RMB currency in 2015 also translated to higher expenses in Singapore dollar for China operations compared to 2014. However, the increase was mitigated by absence of exchange loss amounting to $1.48 million recorded in 2014.

Like Singapore, the tourism sector is heavily influenced by government policies in China. Due to this, the business outlook for Straco Corp is, to a large extent, subject to China’s regulatory changes. For example, in 2015, Underwater World Xiamen recorded a 20% decline in revenue and profitability as a result of measures introduced by the authorities to limit visitor traffic to Gu Lang Yu, as part of the island’s ongoing efforts to attain status as a UNESCO World Heritage site. To mitigate the impact, Straco had to extend the operating hours and introduce new themes to the aquarium to draw more visitors.

Many analysts may argue that the closing down of Underwater World Singapore by Haw Par Corp was a missed opportunity for Straco to expand its portfolio of aquariums. Probably the stiff competition from S.E.A aquarium of Resort World Sentosa may have put off interest from Straco. Nonetheless, Haw Par Corp still have one remaining aquarium in Thailand. Given that Haw Par Corp’s core business is in selling the Tiger Balm ointment products, it may be a win-win proposition for Straco to acquire the Thailand aquarium. This would help Haw Par Corp to unlock its asset value while enabling Straco to scale its core business in tourism.

Trade With The Whale

My strategy

Before its acquisition of Singapore Flyer in 2014, Straco’s shares were trading in the $0.20 to $0.25 bandwidth. The publicity generated by the acquisition has raised Straco’s profile among investors and turbo-charged the share price to a high of $1.05 in May 2015. Given that the Net Current Value per Share (NCAVPS) is $0.05 and the Net Asset Value for the Group is $0.24, the current trading price of $0.79 represents a high premium for investors.

As Straco’s business outlook is heavily dependent on economic and regulatory changes, the risk in investing in this counter is relatively high. Furthermore, it may take another 4 to 5 years for Straco to break even its investment cost for Singapore Flyer. It has paid $140 million for the distressed asset but managed to turnaround and made it profitable. Hence, it is unlikely that Straco will splash out another sum of money to acquire new assets to add to its portfolio in the near future. This means that growth will likely to be moderate or even stagnate for the next few years.

Another point to note is the shareholdings among its internal stakeholders. Straco Holdings, China Poly Group Corporation and Straco HK Limited together hold more than 75% of the outstanding shares. Under such circumstances, the management could easily make an offer to minority shareholders in a bid to delist the company. Thus, I am cautious about investing in Straco Corp and will enter this counter only at a bargain level of $0.20.

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