STRAITS TRADING CO. LTD (SGX:S20)
Straits Trading Co - A Real Estate-Focused Investment Company With A Gamut Of Growth Options
- Straits Trading Co. (SGX:S20)’s diverse investment portfolio spans multiple asset classes and geographies. It has a strong historical track record of capital recycling and has built up a gamut of growth options in various real estate sub-sectors and resources, with hospitality offering a post-COVID-19 reopening play.
- The recent sale of its ARA stake will see a material uplift in its NAV and underscores Straits Trading Co’s ability to recycle its capital. It will trade at a P/NAV of 0.5x post completion of the sale of is ARA stake.
INVESTMENT HIGHLIGHTS
- Straits Trading Co (STC) is a conglomerate-investment company with a long trading history, first established in 1887 as a tin smelting company and subsequently expanding into resources, property and hospitality across Asia Pacific. It holds majority or strategic stakes in Malaysia Smelting Corp (SGX:NPW), Straits Real Estate (SRE) and Far East Hospitality Holdings (FEHH) as well as a wholly-owned, diversified property portfolio. It will also have a 4.8% stake in ARA Asset Management (ARA) after the sale which is expected to complete in 4Q21.
- Disposal of its stake in ARA. On 5 Aug 21, Straits Trading announced a proposed sale of its 19.0% stake in ARA Asset Management to ESR Cayman (ESR) for a total consideration of S$1.14b. This comprises:
- S$1.0b in considering securities comprising both new ESR shares and convertible vendor loan notes, and
- S$134.8m in cash.
- ESR’s acquisition price implies ARA multiples of 37.2x 2020 P/E and 19.5x EV/LTM which is a very good outcome for Straits Trading Co. Note that Straits Trading Co’s NAV will increase from S$4.03 to $5.70 post completion of the sale, implying 0.5x P/NAV which appears inexpensive.
- The combined ESR and ARA entity will be the largest real asset manager in Asia Pacific (double the size of the next largest manager) with US$129b of AUM as well as being the third largest listed real estate investment manager globally. More importantly, the acquisition creates a ‘new economy’ platform with US$50b AUM and 7.7 sqm of logistics space and > 1,200MW in data centre pipeline across 10 countries in the region. Over 50% of AUM and over 80% of 2020 EBITDA of the combined entity were from new economy, making the enlarged ESR/ARA group as Asia Pacific’s largest logistics and data centre real estate platform.
- Robust 1H21 results. Last week, Straits Trading Co reported a 62% y-o-y increase in revenue to S$219m and a 22-fold increase in its net profit to S$123m. Although its hospitality business continued to be affected by COVID-19, its real estate and resources segment performed strongly with significant increases in EBITDA (see chart at RHS).
STOCK IMPACT
- Straits Real Estate (SRE) is Straits Trading Co’s investment vehicle that seeks out real position. As at end-1H21, Straits Trading Co’s net gearing remained at what we deem as comfortable levels of 53% vs 42% as at end-20. We note that EBITDA to interest coverage rose from 4.5x in 1H20 to 10.8x in 1H21 while its ROE hit a five-year high of 12.2%.
VALUATION
- P/NAV of 0.5x. As at end-1H21, Straits Trading Co’s net asset that Straits Trading Co bought ARA for S$294m and its carrying value prior to the sale was ~S$430m. Given the sale price of S$1.14b, this would represent a gain of ~S$710m or S$1.75/share.
- See
- On an annualised basis, Straits Trading Co currently trades at a 2021 P/E and EV/EBITDA of 5.2x and 5.4x respectively. Assuming the dividends in the past when it made material divestments.
SHARE PRICE CATALYST
- Earnings and value-accretive acquisitions in the company’s targeted logistics and e-commerce space.
- Relaxation of Movement Control Orders in Malaysia which will allow Malaysia Smelting Corp to resume full mining and smelting operations.
Adrian LOH
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-08-20
SGX Stock
Analyst Report
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SAME
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