This article was recently published on www.nracapital.com,and is republished with permission.

KevinScully.a.9.13Kevin Scully, executive chairman of NRA Capital.In Straco Corporation's 2014 financial results, it reported FY2014 revenue of S$92.3mn, up 26.7% with net profit higher by 10.9% to S$37.7mn.  

The Q4 numbers showed a less rosy picture with revenue higher by 32.8% to S$19.4mn and a net profit decline by 21.4% to S$4.4mn.  

That poorer performance reflected its recent acquisition of the Singapore Flyer.  

So did it buy a lemon, is Straco Corporation still a BUY ???? 


Key highlights of the FY2014 results:
 

straco_tunnel1.15@ Straco's Shanghai Ocean Aquarium.
NextInsight file photo.
a) revenue for FY2014 was S$92.3mn up 26.7%, Q4 revenue rose 32.8% to S$19.4mn.

b) net profit for FY2014 was S$37.7mn up by 10.5% while Q4 net profit was S$4.4mn down 21.4%

c) EPS for the year was 4.4 cents while NAV was 22 cents

d) DPS was 2 cents same as 2013

e) gross cash was S$112.5mn from S$108.1mn (but would be $129.8mn if we include the flyer deposit)  but net cash was $19.1mn down from $129.8mn if we include the Flyer deposit.  This probably explains why there was no increase in dividend.

f) in the segmented results, Straco reported that GOW (Giant Observation Wheel - Flyer) had revenue of S$3.7mn and a loss of S$0.598mn for the month of December 2014.  The acquisition was completed on 28 November 2014.

g) the aquariums business continued to do well with revenue of S$84.8mn up 23.5% and reportable segment pretax profits of $62.6mn up 26.5%.

h) the FY2014 earnings were also affected by a forex loss of S$1.49mn from a forex gain of S$2.2mn in FY2013, an the absence of a gain on disposal of property of S$0.7mn which Straco recorded in 2013.

Straco did not give a forecast for 2015 but indicated that China tourism growth should mirror the slower GDP growth of the economy. 


Commentary

I have liked Straco as a captive China domestic tourism play. This business would be deemed to be defensive notwithstanding what happens to the global economy.  

SGflyer8.14The Singapore Flyer "is operational profitable but probably doesn't enjoy the same margin as Straco's China operations." Photo: CompanyThe acquisition of the Singapore Flyer for S$140mn with a remaining lease of 21 years and an option of 15 years was a question mark given the historic performance of the asset.

Only time will tell whether Straco has bought a lemon or another strategic regional tourism asset. But given Singapore's small domestic base - the Singapore Flyer is a proxy of Singapore tourism numbers which is international tourism.

Notwithstanding the Q4 segmented loss from the GOW (Singapore Flyer) reported by Straco - I believe this includes one off items as mentioned in the results of S$2mn, I believe the GOW is operational profitable but probably doesnt enjoy the same margin as Straco's China operations.

I have always valued Straco based on discounted cashflow. Given the rise in S$ interest rates, I have raised my discount rate and also adjusted for the net cash balances given the acquisition of GOW, nothwithstanding this, the stock is still UNDERVALUED. 

I am therefore maintaining my BUY recommendation - it remains as one of My Stock Picks.  I am however moving it from my Yield Portfolio to my Growth portfolio because its share price has more than tripled since my recommendation in 2012 at S$0.25 which has pushed down the dividend yield to 2.6%.

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