Straits Trading showing plenty of value despite strong rise this year
Stock is up 75.1% this year, outperforming STI gain of 13.7%, but remains undervalued relative to its book value
Claudia Tan HS
Singapore
SHARES of Straits Trading have gained 75.1 per cent this year, outperforming the Straits Times Index's gain of 13.7 per cent.
Despite that increase, however, Straits Trading remains undervalued relative to its book value.
As at June 30, Straits Trading's net asset value (NAV) stood at S$4.03 per share. That is 12.3 per cent more than its share price of S$3.59.
The NAV includes investment properties and securities, as well as its stakes in listed and unlisted entities such as Malaysian Smelting Corp, Straits Real Estate, Ara Asset Management, Far East Hospitality Holdings and Suntec Real Estate Investment Trust.
It doesn't include potential revaluations of several assets Straits Trading owns.
Among those assets is a 22.1 per cent stake in Ara Asset Management, a real estate manager.
Hong Kong-listed ESR Cayman is in the process of acquiring Ara Asset Management, and Straits Trading will receive a consideration of US$845.3 million in cash as well as ESR Cayman shares upon completion of the transaction. The company paid just S$294 million for its Ara Asset Management stake eight years ago.
The consideration uses a valuation of HK$27.00 (S$4.68) for each ESR Cayman share. ESR Cayman closed at HK$25.50 on Nov 2, giving it a market capitalisation of HK$77.7 billion. Straits Trading will own up to 4.8 per cent of ESR Cayman following the completion of the deal, which works out to a theoretical value of S$640.6 million.
UOB Kay Hian (UOBKH) estimates that Straits Trading's NAV will jump to S$5.70 following the completion of the deal.
Then there is Straits Trading's 54.8 per cent stake in the tin mining and smelting business Malaysia Smelting Corp (MSC).
Dual-listed on Bursa Malaysia and the Singapore Exchange, MSC has had a great run this year too.
Its Malaysia-listed shares are up 99.3 per cent this year, closing at RM2.85 on Nov 2. In Singapore, the counter is up 104.6 per cent for the year and closed at S$0.90. That gives it a market capitalisation of S$378 million, and values Straits Trading's stake in MSC at S$207.1 million.
Tin prices hit an all-time high this year amid strained supply chains and growing demand from the automobile and electronics industries.
MSC posted a net profit of RM25.1 million (S$8.2 million) for the first half of the year, reversing the net loss of RM12.3 million over the same period last year. Revenue was up 72 per cent to RM603 million.
UOBKH expects tin prices to remain firm in the long run as structural supply issues may persist, and believes MSC shares could rise to RM3.61 if current tin prices persist into 2022. That would value Straits Trading's stake at RM830.9 million.
Straits Trading currently has a market capitalisation of S$1.5 billion. Stripping out the value of its stake in Ara Asset Management and MSC, the rest of Straits Trading is valued by the market at between S$130 million and S$646.8 million.
Real estate growth
Meanwhile, Straits Trading's real estate segment is beginning to look more exciting.
Straits Real Estate (SRE) has become the group's biggest and most profitable business segment.
Straits Trading's net profit was S$122.6 million for the six months ended June 30, 2021, up from S$5.5 million in the year-ago period. Revenue rose 62.2 per cent to S$219 million.
Nearly all of that gain was driven by the property segment. Property revenue grew 18.3 per cent year on year to S$23.5 million during the first half. Net profit from real estate was S$125.4 million for the half-year, up from S$21.8 million across the same period the previous year.
Unlike many other listed real estate groups, SRE enjoys a healthy return on equity (ROE) of 9.5 per cent over the past five years.
In its corporate presentation, Straits Trading compares this ROE figure with the returns of listed real estate investment trusts (Reits), at 6.9 per cent, and listed developers, at 9.4 per cent. But SRE's ROE is also above the ROE of most other locally listed property groups.
SRE takes a diversified and active approach to its property portfolio.
It had in 2020 bought Bourne Business Park, a prime freehold business park in England boasting a resilient income stream from its stable existing leases. It also monetised its residential properties in Japan, realising a gain on an investment that it has held since 2017 at an internal rate of return of 18 per cent.
SRE is also actively exploring logistics properties to ride the e-commerce boom and the growing demand for warehouse space amid supply chain disruptions.
New opportunities
There are several other potential catalysts ahead for Straits Trading.
The easing of border restrictions and the return of travel could revive its hospitality arm.
Straits Trading owns a 30 per cent stake in Far East Hospitality Holdings (FEHH), which manages over 100 property assets with more than 16,500 keys across eight countries.
FEHH's losses widened in the first half of the year, but the group has continued to invest for long-term growth.
It opened six hotels last year, comprising 1,300 rooms across Japan, Australia and New Zealand.
Separately, MSC has recently moved its operations to a new plant in Pulau Indah. Production costs are expected to be 20 per cent lower, production capacity will be 50 per cent higher, and manpower requirements will be trimmed by 40 per cent.
In line with the global decarbonisation trend, the new plant will also reduce MSC's carbon footprint through the use of alternative energy sources such as natural gas and solar panels.
At the same time, the relocation of MSC will allow Straits Trading to unlock the value of the land at Butterworth, Penang. The company is planning to redevelop the land there into a S$1 billion mixed-use hotel, retail commercial and residential project known as Straits City.
According to Straits Trading, the Penang Draft Master Plan 2030 has earmarked Butterworth as an extension of its key district, George Town, which would make it an attractive location for residential and commercial developments
Finally, Straits Trading has recently announced that it plans to up its engagement levels with shareholders. As one of the few companies taking shareholder engagement seriously, it has created a shareholders' club to provide details about its plans and also give shareholders coinvestment opportunities.
READ MORE:
- Hong Kong's ESR to buy ARA for US$5.2b to create world's third-largest listed real estate asset manager
- Hot stock: Straits Trading soars 15.9% on news it will receive US$845.3m from ARA Asset Management sale
- Straits Trading shareholders' club a commendable initiative, but it should re-think co-investment plan
- Straits Trading intends to create value for all shareholders
