Is The High-Flying Straco Corporation Ltd Currently A Bargain?

Straco Corporation Ltd (SGX: S85), the owner of the iconic local tourism landmark, the Singapore Flyer, has seen its shares decline by 17% over the past six months. But, if we go back further in time, the company can legitimately be called a high-flying stock.

Over the past two years, the company’s shares have gained 70% even as the broader market, represented by the Straits Times Index (SGX: ^STI), has lost 13%; over the past five years, Sraco’s 368% return also smokes the index’s 15% fall.

Given Straco’s strong returns these past few years, it’s perhaps natural to wonder if the company can continue delivering the goods for investors. Turns out, there’s a sign that suggests Straco may be a bargain at its current price of S$0.78.

Finding value

A reverse discounted cash flow (DCF) model can be used to understand the implied growth rates of a company’s free cash flow at a given stock price. In the case of Straco, which also counts two aquariums in China as part of its main businesses, the market doesn’t seem to be expecting any high growth from it.

I had used the following inputs and assumptions for my reverse DCF model:

  • Trailing free cash flow per share of S$0.0627 according to S&P Global Market Intelligence
  • Discount rate: 15%
  • Terminal growth rate: 3%

Going straight to the point (for a more detailed look at how a reverse DCF model works, check out here), with Straco’s current share price and the figures above, my number-crunching shows that the market expects Straco’s free cash flow per share to grow at 16.5% 11.0% annually over the next five years, and then at just 8.25% 5.5% per year over the next five years.

Future Years Straco’s implied future free cash flow growth rate
Year 1 11.0%
Year 2 11.0%
Year 3 11.0%
Year 4 11.0%
Year 5 11.0%
Year 6 5.50%
Year 7 5.50%
Year 8 5.50%
Year 9 5.50%
Year 10 5.50%

Source: Author’s assumptions and calculations

The table above gives you another way to make sense of Straco’s aforementioned implied growth rates for its free cash flow per share based on my reverse DCF model.

Where value can be found

From 2010 to the 12 months ended 30 September 2015, Straco’s free cash flow per share has grown at a compound annual rate of 17.2% from S$0.0295 to S$0.0627.

When Straco’s historical growth rate of 17.2% is compared with its implied future growth rates of 11.0% and 5.5%, could the market possibly be underestimating the strength of the firm’s business? It’s worth noting too that Straco’s balance sheet is rock-solid at the moment with S$141 million in cash and just S$77 million in total debt.

A Fool’s take

Just because Straco has managed to grow its free cash flow at a rate of more than 17% per year over the past five-plus years does not necessarily mean that it can continue to do so in the years ahead. After all, the past is no guarantee of the future.

So while the market does expect slower future growth from Straco at its current price in relation to its past achievements, a careful understanding of the company’s growth drivers will still be needed before any investing decision can be reached. Cheap-looking shares can still become expensive nightmares if their businesses crumble.

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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.