This Reasonably Cheap Share Seems Poised For Growth

Since closing at a peak of 3,876 points on 11 October 2007, Singapore’s market bellwether, the Straits Times Index (SGX: ^STI), is still some 15% lower at its current level of 3,296 points. On that basis, Singapore’s share market as a whole might seem to have been a disappointment for investors.

For long-term shareholders of Straco Corporation Ltd (SGX: S85) though, the experience over that same period has been very fulfilling indeed. From a price of S$0.195 on 11 October 2007, Straco’s shares have since gained 269% to S$0.72.

But, that is then and this is now. Can the company continue to be a solid market-beater going forward? A huge part of that answer lies with its current valuation, keeping in mind that shares with lower valuations are generally preferable over ones with higher valuations.

A reasonable valuation

Straco PE ratio

Source: S&P Capital IQ

Straco’s currently valued at 15.7 times its trailing earnings. As you can see from the chart above, that valuation is actually just a little higher than the company’s long-term average PE ratio of 13.1 going back to 11 October 2007. This might mean that Straco’s reasonably valued.

A comparison of Straco’s PE ratio with that of the market’s also points to roughly the same conclusion. Currently, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks the Straits Times Index, is valued at around 13.5 times its trailing earnings.

But, these alone can’t determine if Straco is actually reasonably valued. We’d still have to consider the future of its business too as a reasonably valued share can still turn out to be an expensive mistake if its business deteriorates significantly in the future. On that note, there seems to be signs pointing toward a brighter future for the company.

Attracting success

Straco’s in the business of managing tourism attractions. Currently, its main operational assets consist of two aquariums – the Shanghai Ocean Aquarium and Underwater World Xiamen – which are located in major cities in China. The company has had a great track record in growing the value of the two attractions, as can be seen from the rise in visitor-ship over the years.

Time period Visitor numbers for Straco’s major attractions
2008 1.835 million
2009 1.860 million
2010 2.360 million
2011 2.247 million
2012 2.463 million
2013 3.035 million
First nine months of 2014 3.098 million

Source: Straco’s filings

In the company’s latest third quarter earnings release (announced just last Friday), revenue for the first nine months of 2014 had jumped by 25.2% year-on-year to S$72.9 million while profit for the same period had grown by 16.9% to S$33.3 million. Straco’s growth was mainly powered by the strong increase in visitors to its attractions. And as seen from the table above, it’s worth noting that the number of visitors to Straco’s attractions for the nine months ended 30 September 2014 had already exceeded the number seen for the whole of 2013.

The company also mentioned in the earnings release that it might experience a strong tailwind in China at the moment which can help power organic growth in its business:

“Despite slower economic growth, China plans to boost the country’s tourism industry through a series of new measures and spending, according to guidance released by the State Council in August. This augurs well for the Group.”

Besides organic growth, the company’s recent acquisition of an iconic Singapore landmark – the Singapore Flyer – also gives it other opportunities to grow. Straco’s 90%-owned subsidiary, Straco Leisure (the other 10% belongs to Singapore-based tour operator WTS Leisure), bought the Flyer for S$140 million.

The price of the purchase alone is interesting as it it’s more than 40% lower than the price of S$240 million that the Flyer’s original owners had paid to build it. There are also other ways Straco can extract more value from the asset.

The Edge Singapore had written a profile of Straco’s purchase in late September titled “Wheel of fortune?” In the article, it was revealed that the retail tenants in the Flyer were paying rentals that “were less than 50% of the market rate.” The article added that “[a]ll the tenants” are now on a scheme where they’re “continuing at their existing rates with reviews every three months.” Smart handling of the rental situation could be an easy way for Straco to juice the rental yield it enjoys with the Flyer.

A Fool’s take

There are things to like about Straco’s business given its prospects for growth from both organic and acquisition-related sources. But, there are still risks to consider.

For instance, competitors to Shanghai Ocean Aquarium and Underwater World Xiamen might spring up and steal their thunder. Given the importance of the two assets (the two attractions are the source of almost all of Straco’s revenue currently), the development of such threats ought to be closely watched.

Future plans that are related to the Singapore Flyer are also not guaranteed to be successful. When the Flyer was first opened in April 2008, it ran into all kinds of difficulties and eventually fell into receivership back in May 2013. This is a sign that the successful operation of the local tourism landmark can be a real tough nut to crack. Given the size of the purchase for Straco (for some perspective, Straco’s asset base was just S$173 million just prior to the acquisition), it’s imperative that the acquisition turns out to be a success.

On that note, investors may be comforted by the fact that Straco’s had a great track record in improving tourist attractions. As my colleague Sudhan recently wrote:

“In 2007, the company acquired Underwater World Xiamen for around S$12 million (the effective acquisition cost comes up to only S$9 million given that the attraction had around $3 million in cash). According to an article in Next Insight, the company has already “generated cash of around 4x the effective acquisition cost” of Underwater World Xiamen as of April 2013.”

With all these said, investors would have to weigh the risks and rewards with this share in order to come up with an intelligent investing decision.

Learn more about investing through a FREE subscription to Take Stock SingaporeSign up here to The Motley Fool's weekly investing newsletter that will teach you how to GROW your wealth in the years ahead.

Like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.