Straco Corporation – Undervalued with strong & stable cashflow?
Image of Singapore Flyer
Straco Corporation – Undervalued with strong & stable cashflow?

Straco Corporation (SGX: S85) is in the business of operating tourism-related assets in Singapore and China.

One of the notable key asset in Singapore will be Singapore Flyer, an iconic tourism attraction acquired by Straco Corporation in 2014.

Straco Corporation have 4 key assets located in Singapore and China. The key assets are:

  1. Singapore Flyer, Singapore
  2. Shanghai Ocean Aquarium, China
  3. Underwater World Xiamen, China
  4. Lixing Cable Car at Mount Lishan Xi’an, China

Revenue Overview:

Straco Corporation revenue is not generated evenly throughout the financial year, where up to 40% of revenue is generated in Q3 alone. This can be attributed by the holiday season where more travels and trips were made during this period.

Straco Historical Revenue and Net Profit Margin
Source: http://straco.listedcompany.com/download.html

Overall, the revenue generated is relatively stable, with an exception being FY2014, where revenue increased by 27%, mainly due to increase in tourist visits for its aquariums and acquisition of Singapore Flyer in end of FY2014.

Revenue increased in FY2015, mainly due to the revenue generated from Singapore Flyer is fully reflected in the financial year.

Subsequently, revenue numbers remain relatively stable, for FY2016 and FY2017. An exception in FY2018 where revenue have decreased by 8%, from Q1’2018 and Q2’2018. This is because Singapore Flyer suspended its operations from Jan’2018, and resumed operations on Apr’18.

Q1’19 revenue have rebounded to 24million due to revenue contribution from Singapore Flyer.

Straco Historical Revenue by quarter

Net Profit Margin

While revenue increased over the years, profit margin have slipped to 37% in FY2018, it will be expected that FY2019 will have a slightly better profit margin of around 37%-40%. This is because there were one-off expenses incurred for the suspension of Singapore Flyer in FY2018.

Over the years there is no major acquisition of new tourist attractions, hence it can be expected that the revenue and profit will remain relatively stable, with a possibility of a slight down trend due to global economic outlook.

Revenue by Geographical Location:

Straco Corporation generates majority of revenue (65% – 69%) from its aquarium attractions located in China. Prior to FY2014, 100% of Straco’s revenue was generated from China. The acquisition of Singapore flyer gave Straco Corporation a boost in its revenue, lowering revenue contribution from China to approximately 70%. Foreign exchange will be a key consideration for Straco Corporation. As the revenue is generated in Chinese Yuan, while its financial statements are presented in Singapore Dollars.

Straco Revenue by tourism attraction

Profitability of Tourism Attractions:

From the computation of Return on assets, the Aquarium segment provides a high ROA of approximately 35%, following by its Cable Car segment, ranging from 15%-23%.

Lastly, Singapore Flyer provides a return on asset of approximately 7% across the years, this explains the decrease in profit margin since the acquisition of Singapore Flyer in FY2014.

Table of Asset Profit and Return on Assets
Straco ROA Table

Balance Sheet

Straco Corporation have a very strong balance sheet, due to its strong cash flow generating ability. The company have small amount relative small amount of debt in its balance sheet. As of 31 March 2019, Straco Corporation have a current ratio of 8.9x. Enterprise Value/EBIT of 8.09.

Straco Corporation holds a large amount of cash in its balance sheet. The amount of cash in its balance is sufficient to pay off all its liability and still represents a significant amount of total net assets. Over the years, Proportion of Cash less liabilities to total net asset have increased from 15% in FY2015 to 42% in FY2018.

Cash Less Liabilities to Total Net Assets

Cash Flow & dividend paid

Strong cash generating ability is one of a positive points about Straco. Due to its nature of business, results in high cash flow and low capital expenditure required. With its predictable historical track record, it can be expected that the Free Cash Flow generated will be at approximately 61 to 63 million range.

Dividend paid is approximately 33% in FY2015 to FY2017, with an exception in FY2018. It will be expected that dividend can be sustained at current level, and even maintain at a higher dividend rate of SGD 0.035 (4.67%).

Straco historical freecash flow & dividend paid

Source: https://www.morningstar.com/stocks/xses/s85/valuation

Dividends

In FY19, Straco Corporation have paid a dividend of SGD 0.035, translating into 4.6% dividend yield. Straco have consistently paid out dividend since FY2007, and see a steady increase in dividend paid out.

Source Vezted.com

Valuation

Using the information above, and future forecast of Straco Corporation’s performance, Vezted.com have derived an intrinsic value of $0.94 with a discount rate of 10% using DCF computation.

Straco Simple DCF Computation
Source: Vezted.com

Why current price is lower than DCF computation

Based on calculation above, should you rush to purchase Straco Corporation shares when market opens? There are some potential risk one should be aware of.

  1. Foreign currency fluctuation
  2. Competing tourist attractions in China
  3. Slowdown in global economy, lower tourist visits
  4. Illiquid stock
  5. Slow to increase dividend while company have excess cash

Conclusion

The lack of growth and illiquidity in its stock might be an issue which negatively hurts its valuation. In FY2018 annual report it mentioned about acquiring of new tourist attractions, however there is not much elaboration on it. Hence do not expect any major acquisition to happen in the FY.

Straco Corporation have a strong balance sheet, predictable revenue and profit. Coupled with its strong ability to generate cash flow, it would be a counter ideal for long term investment with decent dividend yield provided dividend of SGD 0.035 can be maintained.

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