After Gaining 16.5% In 3 Days, Is There Still Value Left In Straco Corporation Ltd?

Shares of Straco Corporation Ltd (SGX: S85) have been on a tear over the past three days. Since closing at S$0.79 last Wednesday, Straco’s shares are now up by 16.5% to S$0.92 as of today.

With such strong gains in so short a time, is there still any value left in Straco? For some hints to the question, we could assess the quality of Straco’s business, keeping in mind the important point that it’s a company’s business performance which drives its share price over the long-term.

A quick and useful way to gauge the quality of a business can come from investor Pat Dorsey’s nine-point checklist which he had developed and subsequently shared in his book Five Rules for Successful Stock Investing. Here’re the nine points:

  1. The firm provides regular financial updates, has a long track record as a publicly-listed entity, and has a market capitalisation that isn’t too small.
  2. It has consistently earned an operating profit.
  3. It has generated consistent operating cashflow.
  4. The firm earns a good return on equity.
  5. It has been able to grow its earnings consistently.
  6. It possess a clean balance sheet.
  7. The firm can generate lots of free cash flow.
  8. There are infrequent appearances of one-time charges.
  9. There has not been major dilution of shareholders’ stakes in the firm.

This checklist was designed by Dorsey as a quick way (it was meant to be completed in 10 minutes) for investors to narrow the field of listed companies into the ones which are worthy of a deeper look.

For further elaboration as to why these criteria make sense in the context of finding good investing opportunities, my colleague Chin Hui Leong’s work would be a great place to start. He has a three-part series on the subject: Part 1, Part 2, and Part 3.

With that, let’s drill down into Straco’s business and see how it has fared.

Firing on all cylinders

Straco owns and operates tourist assets – two aquariums in China (the Shanghai Ocean Aquarium and Underwater World Xiamen) and the Singapore Flyer in well, Singapore – and has been listed since 2004. The company also has a sizeable market capitalisation of S$780 million and quarterly earnings releases.

Over the past decade between 2004 and 2014, Straco has consistently generated positive operating income, net income, operating cash flow, and free cash flow. In addition, these four financial figures have also marched steadily upward over time. You can see these in the chart below:

Straco's operating income, operating cashflow, free cashflow, and net income

Source: S&P Capital IQ

Moving on, we come to the next chart (see below), which plots Straco’s returns on equity and key balance sheet figures for the same decade as above. Straco’s returns on equity started the decade at an unimpressive value of just 1.3%. But from 2010 onward, Straco has managed to generate an impressive return on equity of at least 14%.

The chart also shows Straco’s cash and debt levels from 2004 to 2014. As you can observe, the firm has had a very strong balance sheet throughout the years with cash consistently exceeding the amount of borrowings. 2014 saw a spike in debt, but that’s because Straco needed additional capital to fund the S$140 million acquisition of the Singapore Flyer in November.

It’s also worth pointing out that Straco managed to generate its high returns on equity from 2010 onward while having a rock-solid balance sheet.

Straco's return on equity (ROE), total cash, and total borrowings

Source: S&P Capital IQ

We’re down to Dorsey’s pen-ultimate criterion and this is where Straco shines too as the firm has not recorded any significant one-time charges in the 10 years between 2004 and 2014.

Straco's share count

Source: S&P Capital IQ

For Dorsey’s last criterion, I trust it’s obvious to see that Straco has not seen any increase in its share count over the years and so, it’s certainly fair to say that there hasn’t been any major dilution of shareholders’ stakes in the firm.

A Fool’s take

Tallying up the scores, we see Straco checking off every single one of Dorsey’s nine criteria. This suggests that the firm has a quality business and that it could still have value if – and that’s a big if – the firm’s future business performance is anything like what it has achieved from 2010 onward.

In any case, investors would still need to take a deeper dive into the company and better understand its risks and potential for growth in order to come up with an intelligent investing decision on their own.

It’s important to note that Dorsey’s checklist is not the final word on whether a share will be a good or bad investment – it’s meant to help narrow the field, not pick investments.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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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 owns shares in Straco Corporation.