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Broker's take: OCBC initiates a buy call on Straits Trading Co
OCBC Investment Research on Monday initiated a buy call on Straits Trading Co on the back of the diversified investment group's ability to create value for shareholders, while providing a stable dividend yield.
Analyst Eli Lee has a fair value estimate of S$2.73 a share for the group, which has interest spanning the region's real estate, hospitality, resources and investments.
At 04:23pm, it was trading around S$2.34 a share, up 7 Singapore cents, or 3.08 per cent.
Straits Trading Co owns a 20.1 per cent stake in Singapore-listed ARA Asset Management, a real estate fund manager in the region. It also has a 30 per cent interest in Far East Hospitality Holdings, one of the largest hospitality operators in Asia Pacific.
"We believe Straits Trading Co's core competitive strength lies in the group's sharp ability to allocate capital while leveraging on synergies across a wide-reaching eco-system of real estate partners,'' Mr Lee said.
He also sees the privatization of ARA Asset Management to be positive for the group. Once completed, Straits Trading Co will swap its 20.1 per cent stake in ARA for a 20.95 per cent stake in a company that indirectly owns ARA.
"Based on the current offer price, Straits Trading Co will also unlock S$48.2 million in cash which can be redeployed. (It) will also retain exposure to ARA's unique value proposition,'' the analyst said, adding that Straits Trading Co will be the only Singapore-listed entity that is a significant proxy to ARA after its potential privatization.
There are also other catalysts to rally the stock price. These include the potential divestment of the group's property assets in Singapore, which include eight good class bungalows and nine units in Gallop Green, a freehold residential development.
"We are forecasting for domestic residential prices to bottom and recover in FY18 and believe Straits Trading Co may explore a divestment of these assets ahead, unlocking more than S$260 million in cash to be redeployed accretively,'' Mr Lee said.
Significant value may also be realized from the potential revaluation and redevelopment of a site in Butterworth, Penang. The site belongs to Straits Trading Co's 54.8 per cent-owned subsidiary, Malaysia Smelting Corporation Berhad.
Straits Trading Co is also seen benefiting from recurring fee income as an investment advisor for the newly-listed NikkoAM-STC Asia ex Japan REIT ETF.