Straco Corporation Ltd’s Latest Earnings: Flying Profits from the Singapore Flyer

Straco Corporation Ltd (SGX: S85) reported its fiscal first-quarter earnings for the three months ended 31 March 2015 last Friday evening.

The company’s a developer and operator of tourism attractions and it has three such assets in China (two flagship aquariums in Shanghai Ocean Aquarium and Underwater World Xiamen, and one aptly-named cable car-related asset in Lintong Lixing Cable Car).

More recently, Straco added another flagship asset to its portfolio with the November 2014 purchase of the iconic observation wheel in Singapore, the Singapore Flyer.

With all these as a backdrop, let’s dig into Straco’s latest earnings release.

Financial and operational highlights

Revenue for the quarter soared by 71.5% over the preceding year to S$25.15 million mainly due to contributions from the Singapore Flyer and an increase in visitors to Shanghai Ocean Aquarium.

Straco’s strong top-line growth has managed to benefit its shareholders as its net profit for the quarter swelled by 60.5% to S$8.68 million.

On the balance sheet front, Straco ended 31 March 2015 boasting of a healthy financial position with total borrowings of S$90.66 million but cash and cash equivalents that are worth some S$123.54 million. Straco’s balance sheet might have weakened considerably from a year ago when it had S$106.83 million in cash and zero borrowings, but it should be noted that the firm had taken on debt mainly to help finance the S$140 million acquisition of the Singapore Flyer.

Investors might be happy to note as well that the firm’s cash flow situation has improved. Straco ended its latest fiscal first-quarter with S$11 million in operating cash flow, S$971,000 in capital expenditures, and thus S$10 million in free cash flow (operating cash flow minus capital expenditures); a year ago, the self-same figures were, respectively, $853,000, S$267,000, and just S$586,000.

As Straco’s a tourism asset owner and operator, one very important figure to track would be the change in the number of visitors to its sites. On that front, Straco reported that it enjoyed a 32.9% year over year increase to 942,000 visitors for the quarter for all its attractions.

But while one-third growth in the number of visitors seems highly impressive at first glance, it should be noted that the visitor numbers for the latest fiscal first-quarter had included arrivals to the Singapore Flyer; the observation wheel was an asset that wasn’t in Straco’s portfolio a year ago. As such, the year over year comparison in quarterly visitor numbers given by Straco is not a pure apples-to-apples comparison.

Straco’s future

Wu Hsioh Kwang, Straco’s Executive Chairman, commented in the earnings release that the firm’s “happy with this quarter’s result” and that’s entirely understandable given the strong revenue, profit, and cash flow growth that I’ve just described earlier.

Wu also gave the following thoughts in the earnings release on Straco’s future outlook:

“China’s domestic tourism market is expected to remain buoyant, as the industry plays an important role in the country’s economic growth. Despite new government guidelines to manage overcrowding, which have impacted our visitor numbers at UWX, we opined that the long term effect will be the smoothening out of domestic travel over the year, leading to less overcrowding and more optimal experience for our visitors.

We will continue to enhance our exhibits to reap the benefits of smoothened visitor numbers throughout the year. In Singapore, while the outlook in 2015 appears to be challenging, we expect the nation’s Golden Jubilee campaign to have a positive impact on our business.”

Foolish Bottomline

With Straco being an operator of tourism assets, the financial performance of the company largely hinges on whether it can continue to attract tourists to its sites. As a result, it is highly dependent on the competitive landscape (in terms of the number of tourist attractions) as well as on the state of the economy in the key geographic markets it’s in (namely China and Singapore).

At its closing price of $1.05 last Friday, Straco traded at 22 times its latest trailing earnings and offers a dividend yield of 1.9% (based on its annual dividend of S$0.02 per share in 2014).

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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 contributor James Yeo doesn’t own shares in any companies mentioned.