Straco Corporation

[yenyenpark]

Not landing a high flyer After much anticipation, Straco announced its acquisition of the Singapore
Flyer, an iconic landmark in Singapore but one that has struggled to keep visitor arrivals from falling since its opening in 2008. We are not optimistic about this acquisition as a quick turnaround is unlikely and the high
operating costs and interest cost are likely to be a drag on margins. We
downgrade our call from add to Reduce and would turn more positive when
Straco has proven its ability to turn the asset around. Our DCF-based target
price falls to S$0.79 (13% WACC) as we factor in the new earnings
contributions, new debt and lower cash balance post-acquisition.

. The remaining 10% will be held by WTS Leisure Pte Ltd, a strategic partner
in the local tourism industry that owns and operates a fleet of 350 tour buses in Singapore. The acquisition will be
funded via cash and bank debt. Plans for the Singapore Flyer will be revealed
when Straco officially takes over in 2-3 months’ time.

What We Think
The total purchase consideration of S$140m represents a 42% discount to the
Singapore Flyer’s initial cost of S$240m. While Straco was bidding against
several other parties for the asset, we believe that it would not overpay given its measured approach towards expansion. The asset is expected to bring in positive cash flows immediately but we estimate that it is mildly dilutive for
EPS in the near term (2-3% dilution) and will only be accretive in FY17 and
beyond as visit or arrivals pick up. The operating structure is similar to that of
Straco’s aquariums as the bulk of operating costs are fixed; this means that
operational efficiencies can only be reaped above a breakeven point which we
estimate to be 1.4m visitors/year. We believe that a turnaround story hinges on
1) stronger visitor arrivals in Singapore, driven by the return of Chinese tourists,
2) channelling tour groups to the Singapore Flyer through its partner, WTS, 3)
redevelopment of the area by adding attractions
, and 4) better tenant mix.

What You Should Do
We believe the recent share price run
-up was fuelled by expectations of
immediate earnings accretion from the acquisition. However, the Singapore
Flyer has seen declining business over the last six years and
a strong turnaround may be difficult in the near term
.We expect the share price to react
negatively to this news, hence our downgrade from add to Reduce. We will turn
more positive when visitor arrivals gain traction and bring efficiency gains.

[yenyenpark]

Estimated earnings contributions from
the Singapore Flyer Based on visitor arrivals of 1.3m/year and 50% occupancy at its terminal
building, we believe that the Singapore Flyer will be mildly dilutive for EPS in
the near term. We estimate that the Singapore F
lyer’s cash flow breakeven point is 0.9m visitors/year (12% capacity utilisation) while the breakeven point
for earnings is 1.4m visitors/year

Our sensitivity analysis suggests that beyond 1.5m visitors/year, every 0.5m
increase in visitor arrivals per year at the Singapore Flyer would add S$7.8m to
PATMI. This translates into 22% EPS accretion based on FY14 figures. Our
current visitor arrival forecasts for FY15-16 are 1.3m. We expect slightly stronger visitor arrivals of 1.5m
-1.6m in FY17-18 as possible rejuvenation efforts are likely to attract more tourists. The record level of visitors for the
Singapore Flyer is 1.9m in 2008 when the attraction first opened.

[CityFarmer]

I assume the last few posts are from analyst reports, please name the sources, and links if possible.

Regards
Moderator

[edragon]

Found this CIMB Research

[value:search]

Straco has just announced that it initiated shares buy back for a total of 125 lots at $0.77 today. It looks like management is well aware that the Flyer acquisition could be a piece of negative news for the market. The shares buy back was triggered by the company to sort of sending a vote of confidence...

Personally, I do think that Straco operating margin will likely shrink in the next 2 years following the acquisition. With interest rate forecasted to rise, finance cost will creep-up and a higher operating expenses can be expected. Even if a solid plan to turn around the current uninspiring visitation at Flyer is in place, it will take times for the plan to materialize.

The management will definitely have to inject drastic change and think out-of-the-box to provide a reasonable ROA. Meanwhile, I believe Straco share price will be under some selling pressure in the short term. Let's wait for the management to announce their plans for the Flyer and see how the market will react...

[LionFlyer]

Zouk at Flyer will have a different vibe. At Jiak Kim street, due to the usage of the old warehouse building, there is a certain cool, street cred. At Flyer? Maybe targeting the moneyed crowd who is there for the brand rather than the music.

[greengiraffe]

Aiya...

just be patient lah, Co already no fear buying their own shares despite supposedly taking on gearing.

Moreover, this is the first major acquisition in high land costs Singapore after making so much money from China, where land costs is substantially lower and certainly boasts of the World's largest population.

Wu not stupid lah - hard earned money leh...

Sometimes simply because of share price fluctuations spooked so many investors...

The flyer acquisition price is already a huge hair-cut, ie the previously over zealous guy already flushed down the toilet bowl... what more u guys want...

STB also want to ensure that the wheel continue to spin... no eye sore at Marina Bay... cannot afford to screw up so many times.

Just wait lah... in the end, nay sayers will be proved stupid again just like all the doubters in Towkay Charoen who has been writing literal "blank cheques" across the globe..

GG

[Belg]

Aiya...

just be patient lah, Co already no fear buying their own shares despite supposedly taking on gearing.

Moreover, this is the first major acquisition in high land costs Singapore after making so much money from China, where land costs is substantially lower and certainly boasts of the World's largest population.

Wu not stupid lah - hard earned money leh...

Sometimes simply because of share price fluctuations spooked so many investors...

The flyer acquisition price is already a huge hair-cut, ie the previously over zealous guy already flushed down the toilet bowl... what more u guys want...

STB also want to ensure that the wheel continue to spin... no eye sore at Marina Bay... cannot afford to screw up so many times.

Just wait lah... in the end, nay sayers will be proved stupid again just like all the doubters in Towkay Charoen who has been writing literal "blank cheques" across the globe..

GG

GG,

Well said, It was a very good piece of work by Wu. This will be his big showcase of his ability to make good something that failed before. There is nothing to lose for Wu and many wins to come if he succeed, I.e. More collaboration with STB to boast tourist income in Singapore. Not forgetting Wu is also one of the leaders of the Singapore Chinese chamber of commence.

Mr Market rates it otherwise as people panic and fear sets on.
Let's all enjoy the ride.

Closely monitoring and hope to pick up some.

[CityFarmer]

GG,

Well said, It was a very good piece of work by Wu. This will be his big showcase of his ability to make good something that failed before. There is nothing to lose for Wu and many wins to come if he succeed, I.e. More collaboration with STB to boast tourist income in Singapore. Not forgetting Wu is also one of the leaders of the Singapore Chinese chamber of commence.

Mr Market rates it otherwise as people panic and fear sets on.
Let's all enjoy the ride.

Closely monitoring and hope to pick up some.

I am optimistic on the new venture, but I remain caution on the risks involved. The last thing shareholders wanted, is the venture become a "national service" mission.

Yes, Straco has the experience, but so do Merlin (operator of London Eye). In short, the venture is not risk-free. It should be a challenging task, but a rewarding one if succeed.

Share-buy-back is indeed a vote of confidence by the management, but interested party vote is always having a lower weight for me. OSIM has done share-buy-back regularly, but it doesn't mean we shouldn't doubt on its business model.

I respect Mr. Wu, an indeed excellence manager. I also do aware that he is also exposed to "unknown unknown" as we all do, although the "unknown known" should be minimum.

(not vested, but monitoring closely)

[Nick]

I have been reading up on the Flyer and thinking about this deal over the weekend. Nothing concrete but a short summary of my views -

1) Straco will be financing the bulk of this acquisition with its cash hoard so there will be no crippling finance cost which seem to have killed off the previous owner. According to Tim Reid, the receiver, the Flyer is generating positive cash-flow so this deal will boost Straco's FCF though not necessarily its profitability. If it does not turn profitable, then the cash-flow is merely a return of its own cash hoard in a long drawn out manner (hardly a great thing). It is likely with a lower depreciation charge and significantly lower interest expenses, the hurdle for profitability will be much lower.

2) Mr Wu is a fairly conservative and shrewd deal-maker. He has shown a great deal of patience sitting on the large and ever growing cash pile without being compelled to make any deals. I can't imagine why he would suddenly be willing to throw all of his hard earned money at a deal unless it has great potential for high returns. The alternative would be to simply declare a $100 million dividend and walk away with a cool $56 million cash. If Mr Wu was a serial acquirer or wasn't fussy with deals offered in the past, I wouldn't be as confident. Moreover, Straco took 1 year to do its due diligence so as Cityfarmer wisely said, the known risk should be well understood.

3) Straco has made only one acquisition in the past. It acquired Underwater World Xiamen from the 3 Tan Brothers in 2007 for $12 million. The aquarium was generating $2 million profit then. After taking over, the Management managed to grow the visitor numbers significantly and according to CIMB report, today, it generates close to $12 million profit - a very substantial return on its initial investment.

4) There are plenty of room to further optimize the Flyer returns. According to the latest CIMB report, the retail block is only 50% occupied by GFA so there is substantial room to introduce an anchor tenant or build new attractions to encourage footfall. They could cut ticket prices to encourage volume and repeat visitors and so on. We have to wait for Management to reveal their plans.

5) The 10% JV partner is WTS Holdings which owns WTS Travel - a huge tour operator in Singapore with over 80 luxurious coaches. It is likely they will work together to encourage tourist to visit the Flyer. Imagine if half of those buses brought tourists to the Flyer daily. Who knows, perhaps Straco will give discounts to aquarium visitors haha. STB is also working with this team.

6) Naturally, nothing is without risk. This is a huge gamble by Straco in its bid to turnaround the much maligned Flyer. I expect capex will be incurred in the years ahead. It must be noted that the underlying land lease has 19 years remaining with an option to renew for another 15 years (according to Wikipedia) so the payback period needs to be fast. Straco will lose the substantial $3-4 million interest income (10% of NPAT) and be dragged by potential losses at the Flyer if it continues to be loss making next year.

7) Based on CIMB pro forma statement of the Flyer on an 'as is' basis, the bulk of the operating cost is fixed - O&M and depreciation expense. The key is to boost visitor numbers from the current 1.2 million to 1.5 million and realize the full potential of the retail podium by ensuring the bulk of the GFA is rent generating. With fixed cost and incremental revenue, like the aquariums, the margins will expand rapidly. The converse is also true, without improving the revenue, it is virtually impossible to boost profitability by cutting cost.

(Vested)