Straco Corporation

[Contrarian]

Does the purchase include paid USE OF LAND FOR XX years?

[CY09]

As this is a commercial zoning, it is likely there is only about 20-25 years left. Singapore flyer land lease started in 2005 and commercial leases of these kind tend to be a term of30 years.

As for the building cost of $250m, it is an irrelevant number to straco. A building costing $250m but generates profit of $3m annually for 30 years will nvr be 250m (unless the building has a lot of golden tapes). It's value will be on the cash generated from the usage of the building and scrap value

[Nick]

WTS Leisure is a subsidiary of Woodlands Transport Service, which was established in Singapore in 1981 and owns and operates one of the largest private transport fleets here.

http://www.businesstimes.com.sg/breaking...m-20140828

http://woodlandstransport.com.sg/index.htm [WTS]

http://www.wtstravel.com.sg/ [WTS Travel]

[Drizzt]

if cash cannot take out how is dividends paid

[learner88]

*WARNING.. Long post*

With no other terms and details, it’s hard to understand what’s the impact of this acquisition.

Turning to my favourite search engine.. here’s what I found.

Merlin was in the running, given that they own and operate the London eye, until they dropped out in May 2014. As the acquirer, there’s potential synergy for them in acquiring Singapore Flyer and setting up a Madame Tussauds. Merlin Entertainments plc (MERL.L), the operator of Madam Trussauds, Legoland and Sea World, has a market cap of GBP 3.5B and a ROE/ROA of 22% and 6.9% respectively. Maybe they have already committed to a MT on Sentosa and having the Flyer doesnt make sense. But whatever it is, Merlin has a track record of delivering 13 years of double digit profit growth since 2000 at the point of its IPO on the LSE. So when Merlin walks away, it could be a sign.

The London Eye welcomes an average of 3.5 million visitors a year. (Do you know? The London Eye was originally put up primarily by British Airways for the millennium and was to be taken down after 1 year. Much like the Effiel Tower!)

According to the UK govt website, the total number of visitors to London in 2013 was a record 16.8 million. And the tourism receipt totalled more than 11.2 billion pounds. There’s also the domestic travellers in the UK and I am not sure if those are included in the statistics. So very roughly, 1/5 of all visitors to London go to the London Eye!

Based on historical facts - in 2009, the London Eye made Merlin 25m pounds. Now, in 2014, adults pay about 20 pounds each and 15 pounds for a child. There’s an extra savings of 15% if tickets are bought online. Working back, if we say that there were about 3.2 million visitors in 2009, net of costs and interest, Merlin earned about 8 pounds from each visitor. At 17.5 pounds (average of adult and kid), that's more than 40% margin!

*****
Back to Straco
*****

Straco, on the other hand, has a prized asset in the SOA. Market cap of $700m with ROE/ROA of 21% and 18% respectively. Management has said that SOA is unique and the proposed acquisition will not be in the same league in terms of financial returns. As long as the acquisition is not losing money and can earn more than bank interest rates, it will be earnings accretive.

Without considering the capital structure and ignoring the 10% partner for the time being:

Using Merlin’s ROA (because it’s the “industry” for the attraction business):
Purchase price $140m
ROA at 6.9% = $9.7m or $10m for convenience

Arbitrarily using the 80/20 rule - the Flyer must make $8m and the real estate must make $2m a year.
$8m over 365 days = $22k a day from the Flyer.
It runs 830am to 1030pm currently, so that’s 14 hours, if we average out the peak and the off peak utilisation.

At the average price of $27 (adults $33, child $21), say with 10% commission going to the travel agencies, and arbitrarily using a margin of 80% (low variable cost business), each passenger earns them $19.5.

So to make $22k a day from the flyer, Straco would need just over 1,100 visitors a day.

Sanity check: Flyer’s capacity is 28 capsules x 28 passengers x 37 mins per trips every x 14 operating hours = 17.8k a day or 6.5m annually

So it may seem like $140m is quite a steal as you need about <6.5% utilisation to get the “normal” industry returns. Has anybody counted the human flow at the Flyer? 1,100 sounds doable. It’s about 30 bus loads for a 14 hour day.

For reference:
London Eye annual ridership is just over 3.5m.
Capacity = 32 capsules * 25 people * 2 /hr * 11 hours * 365 days = 6.4m
So the London eye is operating at 55% utilisation! What a gem!

Conclusion: Given the current disclosure, it seems like $140m is indeed a steal. So was it national service for Straco to take over the assets? I guess not. Only time will tell. Perhaps, there was pressure not to sell(out) the icon to Merlin (*ahem* foreigners) too cheaply. So there’s a price for Straco and there’s a price for Merlin. Of course, I have no idea about the tenure, the land cost, etc etc....

******
Realistically what can happen?
******

Using a ROA of 10% (a higher hurdle, especially given how profitable SOA is)
NI required = $16.8m
Again, with all the same margins as before, daily ridership required = 1.9k

So why did the original owners SFPL fail?

The figure $240m has been widely quoted. From what I have read, that is the amount that the banks have loaned to SFPL. Assuming that its 20/80% financed, SFPL put in another $60m (equity) and obtained $240m (debt) as loan. So $140m is less than half priced. Coincidentally, the London Eye costs 70m pounds or about S$140m to build.

For SFPL:
Debt level = $240m
Interest payment = $7.2m annually at 3%!!!!
I guess that is the reason why it failed!

******
Turnaround play
******

Once again, there are many things Straco can try to do to turn the business around… They sort of have done it once at Xiamen to turn around UWX.
- Improve the returns from the real estate (better shops, better restaurants, better marketing, Zouk? etc)?
- Change the pricing system to maximise profits?
- Use WTS and bring in more visitors?
- Get more corporate events?

Till we get more details and numbers, I think it's a decent acquisition as opposed to money sitting in the bank (in SG or China).

[thor666]

Im really not sure whether the flyer can attract even 1000 people on average. Will need to target tourists. People who have been in singapore for long knows how awfully boring the flyer can be.

I guess thats what wts leisure is in for. To bring in the numbers.

If straco can turn the related premises to a shopping mall of sorts, that would make more sense.

Maintenance of the flyer alone, I think would be quite expensive.

More details really required to tell whether this is something worth it.

Like I mentioned in my previous post, im more interested in what isnt mentioned - the china tender that was shared.

[learner88]

As far as I know, there is no other China tender. I believe this is the tender mentioned at the last AGM.

There is the Chao Yuan Ge project that Straco is trying to finalise. Other than that, they are also upgrading UWX.

[thor666]

If my memory serves me right, management started the discussion on tender as one of the shareholders queried one of the items on the agm. (I wrote down somewhere but being my first time attending then, my notes are probably not accurate) I think it relates to the ar point 9, under deposits.

One of the directors shared that, in china, they need a sizable amount of cash to bid in tenders. Hence unless the comment was a clever diversion, I am guessing that straco did bid for another tender in china.

Please do correct me if I may be wrong as it was my first time attending agm and my memory is not so clear. (I did try to be attentive!)

[Greenrookie]

*WARNING.. Long post*

With no other terms and details, it’s hard to understand what’s the impact of this acquisition.

Turning to my favourite search engine.. here’s what I found.

Merlin was in the running, given that they own and operate the London eye, until they dropped out in May 2014. As the acquirer, there’s potential synergy for them in acquiring Singapore Flyer and setting up a Madame Tussauds. Merlin Entertainments plc (MERL.L), the operator of Madam Trussauds, Legoland and Sea World, has a market cap of GBP 3.5B and a ROE/ROA of 22% and 6.9% respectively. Maybe they have already committed to a MT on Sentosa and having the Flyer doesnt make sense. But whatever it is, Merlin has a track record of delivering 13 years of double digit profit growth since 2000 at the point of its IPO on the LSE. So when Merlin walks away, it could be a sign.

The London Eye welcomes an average of 3.5 million visitors a year. (Do you know? The London Eye was originally put up primarily by British Airways for the millennium and was to be taken down after 1 year. Much like the Effiel Tower!)

According to the UK govt website, the total number of visitors to London in 2013 was a record 16.8 million. And the tourism receipt totalled more than 11.2 billion pounds. There’s also the domestic travellers in the UK and I am not sure if those are included in the statistics. So very roughly, 1/5 of all visitors to London go to the London Eye!

Based on historical facts - in 2009, the London Eye made Merlin 25m pounds. Now, in 2014, adults pay about 20 pounds each and 15 pounds for a child. There’s an extra savings of 15% if tickets are bought online. Working back, if we say that there were about 3.2 million visitors in 2009, net of costs and interest, Merlin earned about 8 pounds from each visitor. At 17.5 pounds (average of adult and kid), that's more than 40% margin!

*****
Back to Straco
*****

Straco, on the other hand, has a prized asset in the SOA. Market cap of $700m with ROE/ROA of 21% and 18% respectively. Management has said that SOA is unique and the proposed acquisition will not be in the same league in terms of financial returns. As long as the acquisition is not losing money and can earn more than bank interest rates, it will be earnings accretive.

Without considering the capital structure and ignoring the 10% partner for the time being:

Using Merlin’s ROA (because it’s the “industry” for the attraction business):
Purchase price $140m
ROA at 6.9% = $9.7m or $10m for convenience

Arbitrarily using the 80/20 rule - the Flyer must make $8m and the real estate must make $2m a year.
$8m over 365 days = $22k a day from the Flyer.
It runs 830am to 1030pm currently, so that’s 14 hours, if we average out the peak and the off peak utilisation.

At the average price of $27 (adults $33, child $21), say with 10% commission going to the travel agencies, and arbitrarily using a margin of 80% (low variable cost business), each passenger earns them $19.5.

So to make $22k a day from the flyer, Straco would need just over 1,100 visitors a day.

Sanity check: Flyer’s capacity is 28 capsules x 28 passengers x 37 mins per trips every x 14 operating hours = 17.8k a day or 6.5m annually

So it may seem like $140m is quite a steal as you need about <6.5% utilisation to get the “normal” industry returns. Has anybody counted the human flow at the Flyer? 1,100 sounds doable. It’s about 30 bus loads for a 14 hour day.

For reference:
London Eye annual ridership is just over 3.5m.
Capacity = 32 capsules * 25 people * 2 /hr * 11 hours * 365 days = 6.4m
So the London eye is operating at 55% utilisation! What a gem!

Conclusion: Given the current disclosure, it seems like $140m is indeed a steal. So was it national service for Straco to take over the assets? I guess not. Only time will tell. Perhaps, there was pressure not to sell(out) the icon to Merlin (*ahem* foreigners) too cheaply. So there’s a price for Straco and there’s a price for Merlin. Of course, I have no idea about the tenure, the land cost, etc etc....

******
Realistically what can happen?
******

Using a ROA of 10% (a higher hurdle, especially given how profitable SOA is)
NI required = $16.8m
Again, with all the same margins as before, daily ridership required = 1.9k

So why did the original owners SFPL fail?

The figure $240m has been widely quoted. From what I have read, that is the amount that the banks have loaned to SFPL. Assuming that its 20/80% financed, SFPL put in another $60m (equity) and obtained $240m (debt) as loan. So $140m is less than half priced. Coincidentally, the London Eye costs 70m pounds or about S$140m to build.

For SFPL:
Debt level = $240m
Interest payment = $7.2m annually at 3%!!!!
I guess that is the reason why it failed!

******
Turnaround play
******

Once again, there are many things Straco can try to do to turn the business around… They sort of have done it once at Xiamen to turn around UWX.
- Improve the returns from the real estate (better shops, better restaurants, better marketing, Zouk? etc)?
- Change the pricing system to maximise profits?
- Use WTS and bring in more visitors?
- Get more corporate events?

Till we get more details and numbers, I think it's a decent acquisition as opposed to money sitting in the bank (in SG or China).

Great work learner!!

Only question, wouldn't margin of 80% be too high? How did you get 80%?

I did not study in details. But I thought labour costs, land rental costs are crippling in Singapore? Labour might be minimum, maybe about 20 in one shift?

If margin is 40%, then your number will need to double. I do think flyer serve more than 1000 in a weekend evening.

-------------------

Also I also remembered watching in the news when Singapore Flyer first went into receivership. The analyst mentioned something about (can't remembered actual words)" it is not that the SIngapore Flyer is not a good business plan, but there is some miscalculation in its capitalization/ plan"

I am not sure what he mean, but I assume it took on too much debt? And the interest is crippling?

Straco will not have this problem, I guess. (140 mio is lower, and highly unlikely the bulk of it will be funded by debt.)

[specuvestor]

First and foremost make the parking free during lunchtime again agree with Thor that weekday doesn't seem to garner 1k patrons for the ride. Thought the retro food stalls were quite nice

I think main thing is how to develop the potential of the place as it's really not conducive and out of normal traffic. Reminds me of the multiple Sentosa fails in the past 30 years until they got the connecting bridge up (not casino)