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Can This Phenomenal Market-Beating Share Continue To Be A Winner?

Over the past six-plus years since the start of 2009, tourism-asset owner Straco Corporation Ltd (SGX: S85) has seen its shares increase by a phenomenal 744% in price to S$0.76 currently.

In comparison, Singapore’s market benchmark, the Straits Times Index (SGX: ^STI), has grown by barely 93% to around 3,400 points at the moment.

Given the share’s strong historical run, it is natural to ask: Will Straco continue to be a winner?

That’s certainly not an easy question to answer. But fortunately, the legendary investor Peter Lynch has given us some great tools to help with that. In his book One Up on Wall Street, Lynch shared the checklist he had used personally while he was managing the Fidelity Magellan Fund in the USA from 1977 to 1990 (he retired in the latter year).

The checklist has served him well (during his tenure as manager of Fidelity, he posted a 27-fold increase for every dollar invested with him!), so let’s see what it can tell us about Straco.

1. The Price-Earnings Ratio: Is it low or high for this particular company and for similar companies in the same industry (generally, low PEs are preferred)?

Straco’s bread-and-butter is in the ownership and operation of tourism assets. Currently, its main assets are two aquariums in China (the Shanghai Ocean Aquarium and Underwater World Xiamen) and the Singapore Flyer.

There aren’t any companies in Singapore’s stock market that have similar kinds of businesses to Straco, so no meaningful peer-comparisons can be made.

But, a comparison of Straco’s PE ratio with that of its own history and the broader market can also give us some meaningful insight.

Straco's historical PE ratio

Source: S&P Capital IQ

As you can see in the chart above, Straco’s current PE ratio of 16.5 is a fair bit higher than its average PE of 11.5 going back to the start of 2009. In addition, the firm’s current valuation is also higher than that of the SPDR STI ETF (SGX: ES3). The SPDR STI ETF, an exchange-traded fund which tracks the Straits Times Index, is priced at around 13.7 times its trailing earnings at the moment.

What we’ve seen so far points to Straco having a valuation that can’t be considered as low.

2. What is the percentage of institutional ownership? The lower the better

This criterion was included by Lynch because he felt that companies that flew under the radar of institutional investors could often make for better bargains due to investor-neglect.

In Straco’s case, it’d be hard for institutional investors to gain any meaningful presence in the company; as of 17 March 2014, Wu Hsioh Kwang owns 55.59% of Straco while the China Poly Group Corporation holds a 22.46% stake. There hasn’t been any significant changes to both parties’ ownership of Straco since then.

Wu’s the Founder and current Executive Chairman of Straco while China Poly Group’s a state-owned enterprise in China which has been a long-time shareholder of the company.

3. Are insiders buying and whether the company itself is buying back its own shares? Both are good signs.

If there are sustained bouts of buying from insiders or the company itself, it could be a sign that the share is undervalued.

Unfortunately, Straco and its insiders have both not been buying any shares over the past six months.

4. What is the record of earnings growth and whether the earnings are sporadic or consistent?

Straco's history of earnings growth

Source: S&P Capital IQ

Straco has been consistently profitable since at least 2007; what’s more it has had a solid track record in delivering earnings growth.

5. Does the company have a strong balance sheet?

A healthy balance sheet is no stranger to Straco given that it has remained debt-free since 2008. The company’s latest financials for the quarter ended 30 September 2014 sees it having S$134 million in cash with zero borrowings.

But that said, investors should also note that the firm’s 90%-owned subsidiary, Straco Leisure, had to take on S$84 million in borrowings to finance the purchase of the Singapore Flyer late last year. The addition of debt would naturally weaken Straco’s balance sheet. Investors would get a clearer picture when Straco releases its results for the year ended 31 December 2014.

6. Does the company have room to grow?

If history is anything to go by, it appears that Straco has some ample room for growth given that visitor numbers to its main attractions in China have been growing steadily over the years. Furthermore, ticketing revenue growth for Straco has outpaced visitor growth, suggesting that the company’s Chinese aquariums are a big draw for tourists.

Straco's history of visitor numbers

Source: Straco’s filings

Straco’s aforementioned purchase of the Singapore Flyer could also add huge room for growth if management plays the cards right. The acquisition, which cost Straco Leisure around S$140 million, is a massive undertaking for Straco given its asset base of only S$206 million just prior to the deal’s completion.

The Singapore Flyer does not seem like an easy asset to run (the tourism landmark actually fell into receivership back in 2013), but Straco’s management has had a good track record of improving the operations of its assets.

A Fool’s take

All told, Straco has ticked off the majority of the right boxes. The firm has low institutional ownership; it has had consistent earnings and earnings growth; it has a strong balance sheet; and it does seem to have room for growth.

But despite the positives, we have not yet arrived at a definite answer as to whether Straco can be a market-beating share going forward.

That’s because there are other important aspects of the company’s business that have yet to be covered. For example, would Straco’s Shanghai Ocean Aquarium suffer now that Shanghai’s Disneyland opened its doors last month? Does Straco have healthy cashflows? Have Straco’s management team displayed integrity and acumen in their business dealings?

These questions and more need to be answered before we can arrive at a more definitive conclusion about Straco’s future market-beating potential.

If you're interested in more investing analyses and the latest news about Singapore's stock market, you can get both from The Motley Fool's free investing newsletter, Take Stock Singapore. Written by David Kuo, Take Stock Singapore can help you grow your wealth in the years ahead. So, come sign up here.

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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 companies mentioned.