Straco Corporation Ltd’s Latest Earnings: What’s Next After A 4% Decline In Profit?

Straco Corporation Ltd (SGX: S85) released its fiscal first-quarter earnings report yesterday night. The reporting period was for 1 January 2016 to 31 March 2016.

As a brief background for some context, Straco is an owner and operator of tourism-related assets in China and Singapore. In China, the company has the Shanghai Ocean Aquarium, Underwater World Xiamen, and Lintong Lixing Cable Car attractions under its umbrella. As for Singapore, Straco had acquired a majority stake in the iconic Singapore Flyer in 2014.

You can catch the results from the company’s previous quarter in here.

Financial and operational highlights

The following’s a quick rundown on some of the latest figures from Straco:

  1. Revenue for the quarter increased by 5.1% year-on-year to $26.43 million.
  2. But, profit attributable to shareholders declined by 4.0% compared to the corresponding quarter last year. Profit for the reporting quarter was $8.34 million.
  3. Consequently, Straco’s earnings per share (EPS) dipped by 4.9% from 1.02 cents in the first-quarter of 2015 to 0.97 cents.
  4. Cash flow from operations came in at $13.24 million with capital expenditures working out to be just $1.87 million. This thus gives the tourism asset operator a healthy $11.4 million in positive free cash flow for the reporting quarter, up by 13.3% from the $10.3 million seen a year ago ($11.0 million in cash flow from operations and $971,000 in capex).
  5. As of 31 March 2016, Straco had $139.9 million in cash and equivalents and $70.9 million in borrowings, translating into a net cash position of around $69 million.

In sum, Straco’s revenue continues to inch up higher, underpinned by increased sales from the Singapore Flyer, Shanghai Ocean Aquarium and Lixing Cable Car that more than offset lower revenue from Underwater World Xiamen.

But, the firm’s profit had declined.  Straco’s executive chairman, Wu Hsioh Kwang, had provided some insights in the earnings release on the slight decrease in the bottom-line:

“Net profit dropped 4% over last year’s corresponding period despite a 5.1% revenue growth, attributable to the start-up cost of the Chinese Restaurant at Singapore Flyer which commenced business in February, higher staff cost on more headcount, as well as the sales tax on ticket revenue paid by SOA [Shanghai Ocean Aquarium] this quarter while pending waiver to be granted for this year. No sales tax on ticket revenue was paid by SOA in 1Q2015.

Excluding the sales tax paid, net profit would have been in line with 1Q2015.”

The bright note is that Straco continues to generate a steady and growing stream of free cash flow and has a strong balance sheet to boot, as alluded to by its net-cash position.

Meanwhile, Straco’s tourism assets experienced a 5.1% year-on-year jump in overall visitor arrivals to 991,000 for the reporting quarter. This is an important figure to track for Straco as it gives insight into the popularity of the firm’s assets with travelers.

Prospects and valuation

Wu had given his take on the outlook of Straco’s China business in the earnings release:

“The outlook of China’s tourism appears positive, as the country seeks to promote tourism as a new economic growth engine. However, the National Bureau of 2 Statistics of China reported that China’s gross domestic product (“GDP”) grew 6.7% in the first quarter of 2016, the slowest quarterly growth in seven years, but in line with its target range of 6.5% to 7% for the year.”

Straco also commented that “China will invest 20% more in its tourism industry this year, compared to 2015, as tourism is playing an increasingly important role in the China economy, accounting for about 10.8% of total GDP growth and 10.2% of national employment in 2015.”

The firm added that preliminary data from the Singapore Tourism Board showed that tourist arrivals had increased by 12.3% year-on-year in January and February this year. For 2016 as a whole, the Singapore Tourism Board had projected a 0-3% increase in visitor arrivals and 0% to 2% growth in tourism receipts.

At its closing price of $0.785 yesterday, Straco traded at just 13.7 times trailing earnings.

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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 owns shares in Straco Corporation.