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What’s Driving This Phenomenal Market-Beater’s Returns?

Since the start of 2007, Singapore’s market benchmark the Straits Times Index (SGX: ^STI) has gained barely 11% to its current level of 3,316 points. But for long time investors of tourism asset owner Straco Corporation Ltd (SGX: S85), those same seven-plus years have been very fruitful with the company’s shares having shot up by some 525% to S$0.75.

As I wrote in a separate article earlier today, the company’s share price gains have partly been driven by the strong growth in its returns on equity. The chart below, which can also be found in the aforementioned article, shows just how much Straco’s economic performance has improved:

Straco's returns on equity and balance sheet

Source: S&P Capital IQ

Although this climbing return on equity has been a great thing for investors, it brings to mind the question: Can the company’s performance continue? To help answer that, we can breakdown Straco’s returns on equity using the Dupont Analysis.

The Dupont Analysis dismantles a firm’s return on equity into three categories:

  1. Profitability – It is defined as a company’s net income as a percentage of revenue
  2. Operating efficiency – It is measured by dividing a firm’s revenue over its total assets
  3. Financial leverage – This is a firm’s equity as a percentage of total assets.

When expressed as a mathematical formula, this is how it looks like:

ROE = (net income / revenue) x (revenue / total assets) x (total assets / equity)

The chart below shows the breakdown of the firm’s returns on equity over the years.

Straco's Dupont Analysis

Source: S&P Capital IQ

From the Dupont Analysis chart, it’s obvious to see how the improvements in Straco’s returns on equity are driven by the increase in its profitability and operating efficiency. For investors wondering about the sustainability of Straco’s improvement in its returns on equity in recent years, the Dupont Analysis thus highlights what needs to be focused on: The firm’s pricing power (related to profitability) and its ability to attract visitors to its tourist attractions (to maintain its operating efficiency).

Currently, Straco’s main revenue-generating assets are two aquariums located in China, namely, the Shanghai Ocean Aquarium and Underwater World Xiamen (the firm had only completed the purchase of the Singapore Flyer late last month). Since 2008, the company has been able to grow visitor numbers at an impressive clip for these two assets as seen in the table below.

Straco's visitor numbers

Source: Straco’s filings

The changes in these visitor numbers would be well worth watching for investors. As for Straco’s pricing power, this is evident in how the growth of the firm’s ticketing revenue has significantly outpaced that of its number of visitors over the years.

Straco's change in revenue and visitor numbers

Source: Straco’s annual report and filings

This relationship between Straco’s ticketing revenue and visitor numbers would be another figure investors should be watching.

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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 company mentioned.