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The Straits Trading Company Ltd - Phillip Securities 2019-06-12: Burgeoning Real Estate Conglomerate

STRAITS TRADING CO. LTD (SGX:S20) | SGinvestors.io STRAITS TRADING CO. LTD (SGX:S20)

The Straits Trading Company Ltd - Burgeoning Real Estate Conglomerate

  • Building a financial real-estate franchise with sizeable assets, backed by a track record of successful asset monetisation.
  • Multiple assets are available to unlock further value in the company.
  • Trading at a 50% discount to RNAV of S$4.40.
  • Dividend yield of 3% supported by S$25mn recurrent income.



ABOUT STRAITS TRADING CO

  • STRAITS TRADING CO. LTD (SGX:S20) has a history dating back to 1887 when it started out a tin smelter. Straits Trading Co formed its property division in 1960. It developed and constructed many prestigious projects around Singapore, including the first iconic 21-storey Straits Trading Building (1972), Great Eastern Centre and China Square Central (2002), and good class bungalows at Cable Road and Nathan Road (2006).
  • 2008 was a major turning point when privately held investment group, Tecity, acquired a controlling stake in the company. This began Straits Trading Co’s journey of transformation from a mere passive owner of low-yielding assets into an active financial investor and developer of real estate. Straits Trading Co had since successfully divested S$1bn of non-core assets, refocusing on its resource business and restructured its hospitality operations.
  • Straits Trading Co now has three core businesses:
    1. Real estate: Straits Real Estate (89.5%), ARA Asset Management (21%) and Suntec REIT (SGX:T82U) (9.8% deemed);
    2. Hospitality: Far East Hospitality Holdings (30%);
    3. Resources: 54.8% stake of Bursa-listed Malaysia Smelting Corp (SGX:NPW), the third-largest tin smelter in the world.


REAL ESTATE


Straits Real Estate (89.5%):

  • This is Straits Trading Co’s in-house real estate investment business. The remaining 10.5% is owned by the John Lim Family Office.
  • The objective of Straits Real Estate is to build a geographically diversified portfolio of property assets that will generate attractive recurrent earnings or returns and capital upside. It may invest directly in real estate or via real estate funds. Straits Real Estate’s modus operandi is to invest in projects with value-add opportunity and manage them to drive capital upside.
  • Operating since 2014, Straits Real Estate has been building its scale and track record. Assets under management have grown at a 36% CAGR from S$358mn in 2014 to S$1.4bn in 2018. 114 William Street (Melbourne) is an example of a property that Straits Real Estate invested in and enhanced, eventually increasing its occupancy and WALE, repositioning it as an institutional-grade asset for sale. Straits Real Estate later successfully monetised it for a profit of A$21.7, at an IRR of 25%.
  • Another successful investment was the divestment of the Greater Tokyo Office Fund, with its four office buildings, for an IRR of 19%. The direct real estate portfolio of Straits Real Estate is now spread across three key geographies – namely, Australia, Japan and China. There are also three property funds under Straits Real Estate that invest in Japan, Malaysia and Australia.

Private Equity Funds

  • ARA Harmony Fund III (40%):
    • ARA Harmony Fund III owns a portfolio of 5 commercial properties in Malaysia. The income-generating properties include Ipoh Parade Mall in Perak, Klang Parade Mall and Citta Mall in Selangor, 1 Mont Kiara Retail Mall and Office Tower in Kuala Lumpur, and AEON Bandaraya in Malacca.
  • Japan Value Fund II (40.82%):
    • the objective is to acquire assets in the Greater Tokyo area and other cities in Japan. The fund is managed by Savills Investment Management.
  • ARA Summit Development Fund (89%) (substantially exited in end 2018):
    • ARA Summit Development Fund co-invest with developers in projects in South East Asia and Australia. The fund may invest as an equity partner to share a project’s development risk and returns, or participate in a project as a mezzanine loan lender for lower risk.
  • ARA Asset Management (20.95%):
    • In October 2013, Straits Trading Co acquired a 20% stake in ARA from Cheung Kong for S$294.4mn. Established in 2002, ARA is one of the largest real estate fund managers in the region with assets under management of S$80bn. ARA was established in 2002 and listed on the SGX in 2007. In November 2016, together with a consortium that included Straits Trading Co, ARA was privatised for S$1.8bn (of 5% equity value to AUM).
    • Gross assets managed by the ARA Group is currently c.S$80.1bn across over 100 cities in 23 countries. ARA plans to grow gross assets by another S$20bn in the next three years. ARA is focused on the management of REITs, private real estate funds, infrastructure funds and operates country desks in China, Korea, Japan, Malaysia, Australia, Europe and the United States.
    • ARA manages 20 REITs, six of which are listed – these are Fortune REIT (SGX:F25U), Suntec REIT (SGX:T82U), Cache Logistics Trust (SGX:K2LU), Prosperity REIT, Hui Xuan REIT and ARA US Hospitality Trust (SGX:XZL).
  • Suntec REIT (9.8%):
  • Singapore and Malaysia properties available for sale (100%):
    • A S$317mn portfolio of legacy investment properties in Singapore and Malaysia is available to be monetised and for capital to be redeployed towards. These include
      1. apartments/ townhouses in Gallop Green development;
      2. good class bungalows in Cable and Nathan road;
      3. several parcels of land and shophouses in Malaysia.


HOSPITALITY


Far East Hospitality Holdings (FEHH) (30%):

  • In November 2013, Straits Trading Co formed a 30:70 joint venture, Far East Hospitality Holdings (FEHH), with SGX-listed Far East Orchard (SGX:O10). Straits Trading Co injected three hotel properties and 13 management contracts into this joint venture.
  • FEHH currently owns and operates a combined portfolio of 94 properties with over 14,700 rooms across seven countries and 25 cities. FEHH also operates nine hotel brands such as Rendezvous, Oasia, Quincy, Village, Far East Collection, Adina Apartment Hotels and Adina Serviced Apartments, Vibe Hotels, Travelodge Hotels and TFE Hotels Collection. Targets to double the rooms under management from 14,700 to 30,000 in 2023.


RESOURCES


Malaysia Smelting Corporation (MSC) (54.8%):

  • Malaysia Smelting Corp (SGX:NPW) is the largest tin mining company in Malaysia and the third largest globally, in terms of output. The company is listed on both Bursa Malaysia and SGX.
  • Malaysia Smelting Corp’s end-product is refined tin bars. It has a tin mine in Perak - Rahman Hydraulic - with an annual production of around 2,300MT per annum. It is considered the largest operating open-pit hard rock tin mine in Malaysia. Tin ore extracted from this mine is processed into tin-in-concentrates which are then converted into refined tin metal products at the smelter in Butterworth, Penang. The mine meets 10% of Malaysia Smelting Corp requirements, with the remaining raw materials sourced locally or overseas.
  • Malaysia Smelting Corp will be relocating from its current plant in Butterworth (operational since 1902) to a new smelter in Pulau Indah, Port Klang. The new facility will be using a more efficient smelting process - Top Submerged Lance furnace. The new plant will boost maximum production capacity by 50% or up to 60,000 tonnes p.a.
  • In view of the relocation, Malaysia Smelting Corp and Straits Trading Co signed a Memorandum of Understanding (MOU) to jointly redevelop a 40.1 acre land site comprising the current factory land (13.9 acres) and adjacent land (26.2 acres) into a integrated waterfront development. The site is freehold and is near the new Penang Sentral, which will be the new transport hub of Penang.


    OUTLOOK


    Laying the foundation for a real estate franchise.

    • Straits Trading Co is building a financial real-estate franchise through its in-house arm, Straits Trading Real Estate (SRE). In a span of four years, SRE has monetised capital in Australia and Japan and tripled its assets under management (AUM). Its competitive strength is its nimbleness in investing in multiple forms, from direct investments to private equity real estate funds.
    • SRE sold an Australian prime office building at an IRR of almost 25% in 2017. In 2018, it divested a Japan office fund after disposing seven office assets at an IRR of 19%. AUM grew at a 36% CAGR over the past four years. Its target is to add S$1bn in AUM within the next four years.

    Several assets to be unlocked.

    • Assets for potential value-unlocking include
      1. S$316mn of non-core properties, including eight good-class bungalows and several townhouses in Singapore;
      2. a 21% associate stake in ARA now carried at S$353mn on its books. If ARA were to be re-listed on the SGX, Straits Trading Co’s 21% stake could be worth S$673mn. ARA plans to grow gross assets by another S$20bn in the next three years; and
      3. the redevelopment of a 40.1-acre mixed-development project in Penang with a GDV of c.RM3bn (S$1bn).

    Tin to benefit the most from new technologies among metals.

    • In a study by Massachusetts Institute of Technology commissioned by Rio Tinto in 2018, tin is expected to be the most sought-after metal by evolving technologies. Demand will come from new technologies incorporated in autonomous and electric vehicles, advanced robotics, renewable energy and advanced computing & IT.
    • Malaysia Smelting Corp is well placed to take advantage with their new plant in Klang that will raise output capacity by 50%.


    RNAV

    • Our RNAV of Straits Trading Co is S$4.40.
      1. Investment properties and private equity real estate are valued as at end FY18.
      2. We added an incremental ARA market valuation to the FY18 book value. We valued ARA’s equity valuation at 4% equity value* to the S$80bn AUM, or 18.2x PE (*Based on data provided in 22-Mar-19 Circular on CapitaLand (SGX:C31) acquisition of Ascendas and Singbridge. Some of the equity to AUM valuations used were Blackstone 4.8% and Cohen and Steers 3.2%. Incidentally, ARA was privatised at 5% equity to AUM or PE of 17.9x). This gives us a S$3.2bn equity value for ARA, with Straits Trading Co’s 21% stake being S$673mn.
      3. We adjusted Malaysia Smelting Corp’s valuation upwards marginally to match its latest market value.
      4. We excluded the potential development gains from the RM3bn Penang project, as it is several years away and we have insufficient information to reasonably forecast the development gains.
      5. We also excluded potential upside from divesting Straits Trading Co’s legacy S$317mn investment properties.

    Attractive valuations and yield






    Phillip Research Team Phillip Securities Research | https://www.stocksbnb.com/ 2019-06-12
    SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998 SAME 99998


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