Tourism asset owner Straco Corporation Ltd (SGX: S85) has been a massive winner in Singapore’s stock market over the past decade. Since the start of 2005, Straco’s shares have climbed by 467%. For context, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has gained just 42% over the same period. But despite its past success, there are signs which point to Straco having the potential to continue doing as well in the future. What signs are these? They come from an investing checklist that the legendary super investor Peter Lynch had shared in his best-selling book, One Up on…
Tourism asset owner Straco Corporation Ltd (SGX: S85) has been a massive winner in Singapore’s stock market over the past decade. Since the start of 2005, Straco’s shares have climbed by 467%. For context, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has gained just 42% over the same period.
But despite its past success, there are signs which point to Straco having the potential to continue doing as well in the future. What signs are these? They come from an investing checklist that the legendary super investor Peter Lynch had shared in his best-selling book, One Up on Wall Street.
Lynch had carved his name into investing folklore through his exploits with the U.S.-based Fidelity Magellan Fund. He started running the fund in 1977 and retired in 1990; in those 13 years, Magellan had posted amazing annualised returns of 29%, turning every $1000 invested in it in 1977 into more than $27,000 by 1990.
With that, let’s check out what Lynhch’s checklist is telling 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 owns tourism assets, as I had already mentioned. Its main attractions are two aquariums in China (the Shanghai Ocean Aquarium and Underwater World Xiamen) and the Singapore Flyer here.
There aren’t many tourism-related companies in Singapore and Genting Singapore PLC (SGX: G13), the owner of Resorts World Sentosa, will be the closest fit.
Source: S&P Capital IQ
You can see in the table above that Straco’s current PE ratio of 15.4 sits comfortably between that of Genting Singapore PLC and the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks the fundamentals of the Straits Times Index. That’s not too bad.
2. What is the percentage of institutional ownership? The lower the better.
This criterion was added by Lynch as he felt that companies that are not noticed by institutional investors (big money managers) tend to make for better bargains as a result of neglect from the investing community.
Straco fares well here as there’s simply not enough room for institutional investors to own a meaningful stake. As of 18 March 2015, Wu Hsioh Kwang and China Poly Group Corporation controls 55.9% and 22.4% of Straco, respectively.
Wu is Straco’s founder and chairman while China Poly Group is a state-owned enterprise in China that 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 insiders and/or the company are buying shares, it could be a sign that the firm’s stock is undervalued.
Straco has been buying its own shares on numerous occasions over the last six months. In October alone, the company had bought shares on four separate days. Straco has a daily share buy-back mandate which started on 29 April 2015; since then, the company has bought back a total of 3.36 million shares of itself.
4. What is the record of earnings growth and whether the earnings are sporadic or consistent?
Source: S&P Capital IQ
Straco excels on this count. The table above illustrates Straco’s earnings per share since 2007; as you can tell, the company has been consistently profitable and its earnings have displayed an unmistakable upward climb too.
5. Does the company have a strong balance sheet?
It’s a simple yes here. As of 30 September 2015, Straco had S$140.9 million in cash & equivalents and just S$76.9 million in total debt. That’s a rock-solid balance sheet.
6. Does the company have room to grow?
This is perhaps one of the most important criterion – a company that can’t grow will find it extremely tough to build value for its shareholders over time. In Straco’s latest earnings release for the third-quarter of 2015, management had the following comments which seem to point to more room for the firm’s business to expand into (emphases mine):
“In a recent Global Tourism Economy Forum Macao 2015 held in October, the chairman of the China National Tourism Administration pointed out that China’s tourism was in a new stage of adjustment, reform and leap-forward, and would maintain rapid growth. This augurs well for the Group’s businesses in China.
In Singapore, the tourism sector is expected to be on target to meet its forecast of more than 15 million travelers this years, despite a dimmed economic outlook ahead, as the economy grew 1.4% in the three months to September 2015 compared to the same period a year ago, its slowest pace in three years. From January 2015 to August 2015, tourist arrivals hit 10.22 million, a marginal drop of 0.6% compared to the corresponding period.”
A Fool’s final take
Straco has performed well on Lynch’s checklist, ticking most of the right boxes. The company has a decent valuation, low institutional ownership, consistent profitability, growing earnings, a strong balance sheet, and the potential for more room for growth.
But, it must be noted that the above shouldn’t be taken to be the final word on Straco’s investing merits. A deeper look into other aspects of its business – such as its cash flow situation and the possible emergence of significant competitors in the tourism landscape – is in order before any investing conclusion can be reached.
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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.