Here Are 4 Things To Like About Straco Corporation Ltd As An Investor

Straco Corporation Ltd (SGX: S85) is a tourism asset owner and operator with business interests 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 bought a majority stake in the iconic Singapore Flyer – one of the largest observation wheels in the world – in late 2014.

As investors, it is important to consider both the pros and cons with a company. In this article, I will be looking at four things to like about Straco’s business from an investor’s perspective. For a list of four troubling things about the company’s fundamentals, check out here.

The first positive: Strong track record of growth

One important aspect about a company that investors should focus on when assessing it is how well its business has performed historically. Though the past is no guarantee of a company’s future performance, it can still provide some guidance for what may lie ahead.

In the case of Straco, revenue has grown from S$18.5 million in 2006 to S$125.2 million in 2016, representing a 21% compound annual growth rate. The company’s profit has climbed at an even faster compound annual rate of 30% (from S$3.38 million to S$46.5 million) over the same period. This is a strong track record of growth.

The second positive: High operating leverage

Straco has significant amount of operating leverage due to having high fixed costs. As such, increases in revenue have a bigger positive impact on the bottom-line.

Investors can expect Straco’s profit to grow at a faster pace than its revenue, assuming (1) that the company is able to increase its revenue over time, and (2) its cost structure does not undergo any major change.

The third positive: Low maintenance capital and working capital requirements

As investors, our aim is to compound our capital at high rates for a long time. To achieve that, one way is to invest in companies with a high return on invested capital (ROIC) and requires little working capital and maintenance capital.

Straco fits the bill pretty well. For instance, in 2015, the company generated a ROIC of nearly 41%. Meanwhile, the company needs little working capital since it has very little inventory (as of 31 December 2016, it has just S$2.1 million in inventory). On the point about maintenance capital, Straco’s capital expenditures in 2016 and 2015 were just 3.0% and 3.1%, respectively, of each year’s revenue.

The fourth positive: The presence of an owner-manager

Straco’s founder, chief executive officer, and executive chairman, Wu Hsioh Kwang, is also a major shareholder of the company, owning a combined direct and non-direct stake of 54.85% as of 23 March 2016.

The benefit of having an owner-manager is that management’s interests would likely be aligned with other shareholders’.

There are potential downsides to such an ownership structure of course – such as the owner-manager benefitting his or her own pockets at the expense of minority shareholders – but there is so far little evidence to suggest this is the case with Straco. The company’s stock has been a solid long-term winner, up some 446% over the last 10 years.

A Foolish conclusion

In my view, there are four reasons to like about Straco as an investor, namely, its strong track record of growth, high operating leverage, low requirements for maintenance capital and working capital, and the presence of an owner-manager.

Yet, there are still things to be concerned about with Straco. I’ve shared the link earlier to the article I wrote about the cons with the company, but for convenience, here it is again.

By considering both the positive and negative aspects about Straco, investors would be able to make a more informed investment decision on the company.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.