Weak market slows Straits Trading's divestment plans

[SINGAPORE] The Straits Trading Company has had to shift gear in its drive to cash out of low-yielding hard assets - no thanks to headwinds in the property market.

Still, divesting its remaining hard assets and setting up new real estate funds as growth engines remain on the cards. The target? An ambitious 10 per cent return on its business units in the long run.

"We have already signalled to the market that at the right price, we will sell our hard assets. The underlying reason is they are low-yielding," said group executive chairman Chew Gek Khim in a recent interview.

"If we sell them at deep discounts, we could convert them very quickly, but it's not something that I would want to do," she said, adding that it is also viable to directly inject some of these assets into funds.

The group's latest divestment was the sale of its flagship Straits Trading Building in Raffles Place to the Sun Venture Group this month for S$450 million, with an estimated gain of S$373.3 million based on a historical cost of S$70.6 million.

Its 2013 annual report showed that it also owned six good-class bungalows, 12 condo units in Gallop Green, 14 units in The Holland Collection and some properties in Malaysia. One of the bungalows on Cable Road was recently sold at a price said to be S$31.8 million or S$1,904 per square foot.

Ms Chew pointed out that the current yields are not where she would like them to be. The group has to first increase its returns before it could raise its free float and usher in more shareholders.

She accepted that the journey to a 10 per cent blended annual yield will involve "very hard work".

The wheels were set in motion after Ms Chew took over the reins of Straits Trading in 2008. The group has been shifting out of lower-yielding assets and ploughing cash into ventures that are expected to reap higher and more sustainable returns.

They include a strategic alliance in real estate with ARA Asset Management and its chairman John Lim as well as a hospitality tie-up with Far East Orchard.

By doing so, Straits Trading has created growth platforms in real estate, fund management and hospitality. It now hopes to nudge them towards faster and sustainable growth.

One key growth driver is expected to come from the new real estate platform, Straits Real Estate (SRE), a co-investment vehicle formed with ARA's Mr Lim last October when Straits Trading acquired a 20.1 per cent stake in ARA. SRE has a capital commitment of up to S$950 million by end-2016, of which Mr Lim is putting in up to S$100 million of his own money.

According to Ms Chew, this fund could reap "very high returns" given its flexibility to take on more risk in diverse real estate investments such as development projects, debt backed by real estate and distressed assets.

A development fund of S$80 million has been set up under SRE to look into development projects in Australia and South-east Asia.

As part of the tie-up with ARA, the latter is also managing Straits Trading's entire investment property portfolio, excluding hospitality-related assets, as a separate account.

Straits Trading's growth platform for hospitality is the 30-70 joint venture with Far East Orchard formed last April. Both parties injected their respective hospitality assets into the venture and agreed to pursue new opportunities together.

This has allowed Straits Trading to transform from a manager of 3,000 rooms under the Rendezvous brand to one of the largest hospitality player in the Asia-Pacific with over 13,000 rooms under management across more than 80 properties.

Ms Chew said: "If you want to do well in the current environment, you need to have scale. In the course of doing these tie-ups, we believe we have found very strong operating partners, so our strength becomes that of a capital allocator, adding value through knowing how to move and structure capital."

Though she is bullish about the changes that have taken place, Ms Chew flagged that profits may be slow and lumpy initially.

Straits Trading swung to a net profit of S$119.5 million last year after being in the red in 2012 when it marked a net loss of S$55.2 million due mainly to impairment provisions from the restructuring. But it again incurred a net loss of S$5.8 million for the second quarter ended June 30 this year, no thanks to fair value losses on investment properties.

Raising the free float of the group from the current 16 per cent to attract a wider following of fund managers is still in the planning, but that will take a while, Ms Chew said, explaining that shareholders with a shorter horizon tend to look for better financial performance every quarter.

Tecity Group, founded by Ms Chew's late grandfather Tan Chin Tuan, holds a 70 per cent stake in Straits Trading. Fund management firms Aberdeen and Third Avenue own respective stakes of 8.15 per cent and 7.32 per cent.

"The transformation has allowed us to squeeze returns out of the old entity. As we transform it and build a new engine, it will take time and that will be slow," Ms Chew said. "But if it works, it will be sustainable over a much longer term."