Straco Corporation (SGX:S85)’s Q1 FY2018 Results

A reader asked me:

“Kelvin, what do you think of Straco’s latest results? Straco owns Singapore Flyer, Shanghai Ocean Aquarium, Underwater World Xiamen and others. It seems like what you’ve described, they have operational leverage. It dropped a lot this quarter…”

Straco is a highly respectable tourism owner and operator, backed by China’s state-owned group called China Poly. The management is highly strategic in purchasing valuable assets. I admire its founder & CEO, Wu Hsioh Kwang who controls >50% of the company.

Here is an extract of his views in this article:

Its founder and executive chairman Wu Hsioh Kwang, 66, does not believe in farming work out to consultants. He wants his staff to handle every venture themselves, “from start to finish”.

“Every time when we invest in a project, we will spend a lot of time and effort on feasibility studies and research ourselves, before spending money on the tender documents. That way, we are able to stay committed, passionate and interested,” he said.

Given his prudent and strategic approach, he was able to purchase Singapore Flyer at S$140 million while the construction cost was S$240 million. He literally purchased it for Price to Book ratio of 0.58.

Basic Fundamentals of Straco (FY2017)

1. Net Debt to Equity -53.1%
2. ROE 17.9%
3. Gross of 91.58% and Net of 37.23%
4. Current ratio of 7.78
5. Negative cash conversion cycle
6. They’ve been building cash rapidly after paying for Singapore Flyer, it would be interesting to see what they can acquire subsequently.

(source: http://infopub.sgx.com/FileOpen/Straco%20AR2017_FINAL.ashx?App=Announcement&FileID=498663)

As we can see, Singapore Flyer (Giant Observation Wheel) contributed 32.1% of revenue for FY2017 and 31.4% for FY2016. Due to its lower profitability, it contributed 15.1% (FY17) and 14.8% (FY16) of operating profit before taxes.

Q1 FY2018 Results

It dropped a massive 31.7% in revenue while the profit after tax dropped 60.1%.

On top of financial statements, we have to look at commentaries.

As explained:

In the first quarter of FY2018, the Group achieved sales of $18.8 million, 31.7% lower than the corresponding period in 1Q2017, mainly due to the more than two months suspension of rides at our Singapore Flyer since 25 January 2018 due to a technical issue. Shanghai Ocean Aquarium (“SOA”) and Underwater World Xiamen (“UWX”) also reported lower revenues this quarter on lower visitor numbers, as well as the value-added tax on ticket revenue being accounted for this year by SOA, as the tax waiver on ticket revenue for Shanghai educational bases for this year has not been issued yet.

Overall visitation to all our attractions was 0.80 million visitors for the quarter, 24.7% lower than the corresponding period in 1Q2017.

So the drop isn’t that drastic because the closure of Singapore Flyer is temporary.

Taking FY17 Q1 revenue at S$27.538m, Singapore Flyer is likely to contribute S$8.842m in FY18 Q1 (assumption: no growth and same margins)

Singapore Flyer likely to have missed out on S$5.894m (two months’ revenue) in FY18 Q1 due to suspension.

Adding S$5.894m back to FY18 Q1 revenue, the revenue should arrive at S$24.689m.

Takig S$24.689m as a fairer comparison, the actual drop in revenue should be roughly 10% – caused by other segments.

As one can see, operating leverage is a double-edged sword. Since Straco is a business with relatively fixed costs, any reduction in revenues may affect the bottom line to a greater extent.

(The aquariums do not have to feed the fishes extra food if there’s more visitors. The Singapore Flyer do not have to spin faster or slower if the cabins are filled or not filled.)

At the moment (15 May 18), it is trading P/FCF 9.4x (LTM) and P/FCF 8.2x (FY17) ex. net cash.

I am a bit worried about how they are able to improve their visitors number and what they are going to do with their cash hoard. It has been a 4 years after they’ve bought Singapore Flyer. The operational leverage’s ugly side could also affect their bottom line. There are visitors restriction imposed on Gulangyu Island which affects their Underwater Xiamen and Shanghai Polar Ocean Park could be a formidable competing tourism spot against their Shanghai Aquarium (biggest revenue contributor).

Do read up more on Straco because I think Wu Hsioh Kwang did a fabulous job growing the business.