For Straco Corporation Limited (SGX: S85), an experienced tourism asset operator, generating free cash flow seems to be the norm. To recap, the group owns two aquarium assets in Shanghai and Xiamen as well as 90% of the Singapore Flyer (which was purchased in August 2014). In addition, it also owns the Lixing Cable Car, which leads to Chao Yuan Ge in Xi’An, China.
In order to determine if the group can continue to generate good free cash flow (FCF), I’ll look at Straco’s FCF history and also the state of its business now. Finally, I will look at Straco’s FCF yield and its valuation using a metric known as price to FCF.
Straco has generated very consistent FCF in the past. The jump in FCF from 2015-2017 can be explained by the acquisition of the Singapore Flyer in late 2014, which boosted overall operating cash flow for the group while maintenance costs were kept reasonably low.
In 2018, due to a breakdown in the Singapore Flyer for nearly three months, FCF was also affected, but the group still managed to generate S$47.2 million of it.
Business prospects and capital expenditure plans
From the recently concluded Annual General Meeting (AGM), on which I penned notes, Straco has announced a few projects that will require additional capital expenditure over and above its usual maintenance level. First off, the new Time Capsule attraction at the Singapore Flyer will cost S$10 million, while Chao Yuan Ge will use up around S$10 million per year for the next two years. There are also plans to revamp the Singapore Flyer and Underwater World Xiamen, but no numbers are available yet.
A simple calculation shows that if we assume Straco can generate roughly S$60 million in operating cash flow in 2019, an additional S$20 million of capital expenditure means the group would still be able to generate a healthy level of around S$30 million to S$35 million of FCF.
Investors should also keep in mind that the enhancement of these assets would also increase their attractiveness to potential visitors, and thus may further bump up the operating cash flow for 2020 and beyond. Thus, I can feel fairly certain in saying that Straco can keep generating FCF.
Valuation metrics and dividend sustainability
The FCF yield is calculated by taking the FCF per share divided by the share price. Using the FCF from FY 2018, the FCF per share is around 5.5 Singapore cents. Dividing by the share price of 75 Singapore cents gives a FCF yield of around 7.3%. Note that Straco’s total dividend for the year was 3.5 Singapore cents, so this level of dividend is definitely sustainable based on the current FCF generated.
Finally, calculating the valuation for Straco using price to FCF results in a ratio of around 13.5 times. This is not expensive considering the competitive moat Straco possesses.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Straco Corporation Limited. Motley Fool Singapore contributor Royston Yang owns shares in Straco Corporation Limited.