Straits Trading shares reasonably priced, but management must continue delivering value

STRAITS Trading is one company I have been watching with great interest over the last couple of years.

Controlled by one of Singapore’s most respected business families, the group has an unlikely portfolio of businesses that were formed over the past decade through a bold repositioning of its legacy assets and shrewd corporate deals.

A confluence of factors – including fast growth in its property investment business, the sale of its stake in Ara Asset Management to ESR Group, and surging profitability at its tin business – have seen the group deliver blowout financial numbers recently.

For 2021, Straits Trading saw its earnings before interest, taxes, depreciation and amortisation (Ebitda) rise nearly 200 per cent to S$401 million. Net profit climbed 355 per cent to S$234.3 million. The company attributed the sharp improvement mainly to its real estate-related businesses – including fair value gains on its Australian and Korean logistics property portfolios.

Straits Trading paid a dividend of 8 Singapore cents per share for 2021, up from 6 cents per share for each of the preceding 5 years.

For H1 2022, Straits Trading reported a 290 per cent year-on-year (y-o-y) rise in Ebitda to S$729.1 million. Net profit jumped 449 per cent y-o-y to S$673 million.

During the half-year period, Straits Trading booked a gain of S$658.1 million on the disposal of an associate. The company said the merger of Ara Asset Management and ESR Group was completed in January, and that it had recognised a value of almost S$1.1 billion in a combination of S$142.5 million in cash and 214.7 million ESR Group shares.

On Aug 14, Straits Trading announced a special dividend by way of a distribution in specie. Entitled shareholders can elect to receive either 145 ESR Group shares or 180 Straits Trading shares for every 1,000 Straits Trading shares they own.

It is quite possible, of course, that the group’s earnings will fall back in the short term. And, although they were beaten down during the Covid-19 crisis, shares in Straits Trading have since bounced well above where they were before the pandemic started.

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At their closing price on Sep 9 of S$3.20, shares in Straits Trading have gained some 48 per cent over the past 3 years. The Straits Times Index is up only 2.5 per cent over the same period.

Yet, shares in Straits Trading are still trading at a 39 per cent discount to their net asset value (NAV) as at Jun 30 of S$5.23 per share. Back in September 2019, the stock was trading at a 43 per cent discount to its then-NAV.

On the face of it, shares in Straits Trading still seem reasonably priced despite their strong run. The big question is how the group plans to keep creating value for investors.

Next month – on Wednesday, Oct 5 – readers of The Business Times will have the opportunity to join me as I talk to Eric Teng, one of Straits Trading’s top officials, about the outlook for the company.

Partnerships, joint ventures

One criticism of Straits Trading is that much of its recent success was not entirely of its own making.

Its most significant move over the past decade was arguably the establishment of a “strategic alliance” in 2013 with Ara Asset Management and its founder John Lim.

This involved buying a 20.1 per cent stake in Ara Asset Management for S$294.4 million, and forming an 89.5 per cent-owned co-investment vehicle known as Straits Real Estate (SRE) with Lim.

The deal positioned Straits Trading to profit handsomely when Ara Asset Management was subsequently merged with ESR Group. Meanwhile, SRE has since become a major profit driver for Straits Trading. The group acquired Lim’s 10.5 per cent stake in SRE in 2021.

It was also in 2013 that Straits Trading teamed up with Far East Orchard to create a stronger platform for itself in the hospitality space. Straits Trading holds a minority 30 per cent stake in the joint venture vehicle, Far East Hospitality Holdings.

My own view is that there is nothing wrong with companies forging mutually beneficial partnerships in order to expand.

More to the point, the deals Straits Trading has done over the past decade hewed to a strategic vision of monetising low-return assets and recycling its capital into scalable businesses – which has been beneficial to investors.

New growth engines

Straits Trading now appears to be entering a new phase, described in its latest annual report as being about “converting assets into investment products and platforms for new growth engines”.

The group recently acquired a 14.3 per cent stake in SDAX Financial, an integrated digital investment and trading platform.

Straits Trading has also been offering registered shareholders of its Shareholders’ Club the opportunity to invest in “fractionalised properties” through structured notes. Among the offerings so far are a Good Class Bungalow on Cable Road in Chatsworth Park and a residential property located at Woollerton Park in Gallop Green.

Interest rate risks

The biggest risk for Straits Trading may be rising interest rates around the world – which is bound to weigh on the valuations of real estate assets on its books, and hamper its ability to raise funds on attractive terms.

Certainly, the group does appear to need cash for growth. In January, Straits Trading said it raised nearly S$80.9 million through a placement of 26 million shares at S$3.11 each. The proceeds were for potential acquisitions and business opportunities.

Straits Trading said the placement would enhance its free float – from 25.3 per cent to 29.8 per cent – and address its low trading liquidity.

When Tecity Group – which is linked to the family of the late Tan Chin Tuan – gained control of Straits Trading in 2008, it held almost 89 per cent of the company’s shares. Straits Trading’s latest annual report said Tecity held nearly 69.6 per cent of its shares as at Mar 9.

Whatever the benefits of the placement to Straits Trading’s free float, however, some investors may be uncomfortable that the company chose to place out shares at a more than 40 per cent discount to its book value.

If you want to hear what Straits Trading’s Eric Teng has to say about this or anything else related to the group’s business and strategy, you can sign up for our event and send us your questions.

Join Ben Paul’s Mark to Market ‘Live’ with Straits Trading’s Eric Teng on Oct 5 from 12.30pm. The event is exclusively for BT subscribers and Straits Trading’s shareholders. Registration closes on Oct 3. For enquiries, email mkgbtpromo@sph.com.sg.