Editor’s note: The second table in this article had an error concerning the order of the years involved. It has been corrected. The Fool regrets the error. A few years ago, billionaire investor Warren Buffett had shared his favourite business trait. In an interview conducted by the Financial Crisis Inquiry Commission, Buffett said the following: “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the…
Editor’s note: The second table in this article had an error concerning the order of the years involved. It has been corrected. The Fool regrets the error.
A few years ago, billionaire investor Warren Buffett had shared his favourite business trait. In an interview conducted by the Financial Crisis Inquiry Commission, Buffett said the following:
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
So there you have it, the business trait which Buffett thinks is the most important: Pricing Power. Given Buffett’s success as an investor, it would make sense for investors to think about the companies in Singapore which possesses pricing power too.
One strong clue which points to that cherished business trait is a larger change in a company’s sales in relation to the units sold. For tourism asset owner and operator Straco Corporation Ltd (SGX: S85), its pricing power seems evident when we compare the respective year-on-year changes between its revenue and the number of visitors to its assets.
As you can see in the table below, Straco has been adept at growing the number of visitors to its attractions since at least 2008. During that block of time given in the table, Straco’s main attractions were two aquariums located in China – the Shanghai Ocean Aquarium and Underwater World Xiamen.
Source: Straco’s filings
That organic growth in the number of visitors might seem impressive (a 70% spike in less than seven years!) but it’s not nearly as notable as the company’s growth in ticketing revenue.
A quick glance at the table immediately below would make it obvious that Straco has largely been able to generate higher growth in revenue as compared to the number of visitors; in other words, the company seems to possess the ability to raise entrance fees for its attractions without losing visitors.
Source: Straco’s filings
Straco has parlayed this apparent pricing power into impressive earnings growth over the years; from 2008 to the 12 months ended 30 September 2014, the company has seen its net income spike from S$7.7 million to S$38.9 million.
This multi-fold jump in profits has likely been the platform for the company’s impressive market-beating returns. Since the start of 2008, Straco’s shares have delivered capital gains of 300%, soundly beating the SPDR STI ETF’s (SGX: ES3) loss of 10% over the same period. The SPDR STI ETF is an exchange-traded fund which tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI).
But, despite the apparent presence of pricing power, the future for Straco is uncertain.
Last November, the company added another asset to its portfolio of tourist attractions, the Singapore Flyer. The purchase, which was first announced back in August 2014, had cost Straco Leisure some S$140 million. Straco Leisure is an investment vehicle set-up to acquire the Singapore Flyer and is 90% owned by Straco with the remaining 10% held by Singapore-based tour operator WTS Leisure.
The Flyer is a massive purchase for Straco given that the company had a total asset base of only S$206 million as of 30 September 2014. Also, in order to complete the deal, Straco Leisure had to take on S$84 million in borrowings, thus adding debt to Straco’s balance sheet. Straco had been debt-free since 2008 prior to the Flyer-acquisition; the presence of substantial borrowings brings heightened financial risks.
To compound the uncertainty for Straco, the Singapore Flyer has not been a particularly easy business to run, judging from how it fell into receivership back in May 2012.
A Fool’s take
Straco needs the Singapore Flyer to succeed given the relatively-massive resources the company has sunk into the local tourism landmark. But whatever happens from here on, it’s still fair to say that Straco’s other tourist attractions – the two aquariums in China – seem to have been able to command impressive pricing power.
For this reason alone, it might be interesting for investors to follow Straco’s future business developments and observe if the firm can manage the Singapore Flyer in a skillful way so as to imbue the local tourism landmark with pricing power too.
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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.