Straits Trading Company Limited - DBS Research 2021-03-04: The Star Duo – Straits Real Estate & ARA Asset Management


Straits Trading Company Limited - The Star Duo – Straits Real Estate & ARA Asset Management

  • Straits Trading's FY20 PATNCI declines 39.0% y-o-y to S$51.2m, in line.
  • Real Estate engines remain sturdy and strong.
  • Resources segment to benefit as tin prices are 70- 80% off their March 2020 lows.

Straits Trading's FY20 Results Review

  • Straits Trading (SGX:S20)'s FY20 PATNCI (profit after tax and non-controlling interests) of S$51.2m, down 39.0% y-o-y, was in line with our estimates. See Straits Trading's announcements. Straits Trading’s PATNCI declined largely due to a weak operating environment in its Resources segment in 1H20, and continued weakness in its Hospitality segment due to COVID-19.
  • Including non-controlling interest, Straits Trading’s net profit declined 29.1% y-o-y to S$71.2m.
    • Straits Trading's Resources segment recorded a PATNCI of S$3.3m, down 24.7% y-o-y. It was impacted by lower tin prices and disruptions in operations in 1H20, as the Malaysian government imposed the Movement Control Order.
    • Straits Trading's Real Estate segment recorded a PATNCI of S$69.8m, down 10.0% y-o-y. This was mainly due to lower interest income from the notes issued by a joint venture (320 Pitt Street) as well as lower fair value gains on its properties.
    • Straits Trading's Hospitality Segment recorded a PATNCI of -S$11.8m. Its Hospitality segment was adversely impacted by the COVID-19 pandemic as operations were disrupted. It also recorded revaluation losses.

Improvements in its Resources segment in 2H20.

  • Straits Trading's Resources segment swung back from a PATNCI loss of S$2.3m in 1H20, to a PATNCI of S$5.6m. This was largely due to higher average tin prices and higher volume of refined tin sold.

Real Estate segment remains resilient, growth engines undeterred.

  • Straits Trading's Real Estate segment continues to generate steady and stable operating profit despite the impact from COVID-19.
  • Operating profit increased 19.4% y-o-y to S$63.0m in FY20, from S$52.7m. This indicates the resilience of its investment properties under Straits Real Estate (SRE) and Straits Trading’s property portfolio.
  • Share of results and associates and JVs under its Real Estate segment declined by 49.6% y-o-y to S$23.4m in FY20. This was largely due to lower interest income from the notes issued by its joint venture (320 Pitt Street), which we estimate to have contributed S$30-35m in FY19.

Proposed dividend of S$0.06 per share, unchanged from FY19.

Key transactions for Straits Real Estate (SRE) include:

  • Divested nine freehold residential apartments in Greater Tokyo for JPY18.9bn (approximately S$244.2m) and realised a gain for the investment that it has held since 2017. The divestment gains exceeded target returns despite subdued market sentiments amid the pandemic.
  • Expanded into the UK by acquiring a freehold business park known as Bourne Business Park, located in Addlestone, Surrey, England for GBP76.7m (approximately S$137.9m). The acquisition offers resilient income stream from the property’s stable existing leases.
  • Further development of logistics properties in Australia and South Korea and positioned for the rising demand accelerated by the pandemic.

Notable developments for ARA Asset Management Limited include:

  • Completion of the acquisition of a majority stake in LOGOS Group, thereby creating a best-in-class real estate logistics platform in the Asia Pacific. With the support of the platform, ARA LOGOS Logistics Trust (SGX:K2LU) deepened its presence in Australia with a proposed acquisition that will increase its deposited property value by 28.2% to S$1.7bn.
  • Completion of the acquisition of a majority stake in Venn Partners LLP, an investment manager in European real estate private debt, and rebranded the entity ARA Venn. ARA Venn secured €200m from institutional investors for the first close of its latest debt fund in July 2020 and was also appointed by the British government as the exclusive manager of a new £3bn Affordable Housing Guarantee Scheme.
  • Completion of proportional offer for Cromwell Property Group (“CPG”), raising its stake in CPG to 30.7% as at December 2020
  • Tender offer for Kenedix (listed on Tokyo Stock Exchange) by Sumitomo Mitsui Finance and Leasing Company (“SMFL”) and ARA, which turned unconditional in January 2021. Kenedix will be privatised by March 2021, with ARA owning a 30% stake.
  • Growth in its REITs and various private funds, including the acquisition of a 50% stake in the landmark Nova Estate in Victoria, London by Suntec REIT (SGX:T82U), and acquisition of Parc1 Tower II, a landmark office tower in Seoul, South Korea for S$1.2bn.

Our Thoughts on Straits Trading

Real Estate segment is expected to remain sturdy, strong, and a key growth engine.

  • Straits Trading’s two key growth engines in its Real Estate segment, Straits Real Estate (SRE) and ARA Asset Management, continued to drive growth in FY20, and are expected to do so going forward. We remain optimistic on SRE’s continued asset recycling initiatives as well as ARA’s proactive efforts to grow.

All eyes on ARA in 2021/2022.

Higher tin prices to lift Resources segment.

  • As individuals spend more time at home, the global demand for electronics has increased, lifting tin prices. Tin prices on the London Metal Exchange have risen 70-80% off their lows of US$13,000-14,000/MT. We are expecting the higher tin prices to lift its contribution to PATNCI in FY21.

Continue to expect headwinds in its Hospitality segment, but the impact is small.

  • With the ongoing COVID-19 pandemic, we continue to expect poor performance from its Hospitality segment as the average daily rate (ADR) remains subdued by lower occupancies. Nonetheless, we do not see this as a large threat given that its Hospitality segment is still small, accounting for only 5.6% of our valuation.

Straits Trading - Earnings forecast and recommendation

  • We are adjusting our Straits Trading's FY21F/22F earnings forecast as we remove fair value gains in our projections, and as we expect higher contribution from its associates and JVs.
  • Going forward, we are removing our fair value gains projections as they are lumpy and difficult to forecast. We are also increasing the contribution from its associates and JVs as ARA raises its stake in Cromwell and Kenedix.

Maintain BUY with an unchanged target price of S$3.90.

Wei Le CHUNG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-03-04
SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 SAME 3.900