RHB Group Research analyst Vijay Natarajan is highly positive on The Straits Trading Company’s prospects, as he deems it is on its way to “scaling new heights”.
The Straits Trading Company is a group that has interests in real estate and resources with a portfolio of stable recurring income-producing assets that has value-add and growth potential.
These assets have also delivered stable returns over the years, he notes.
“The stock was in the spotlight recently, post its announcement of gains from merger of ARA Asset Management (ARA), in which it owns a sizeable stake. Despite the recent run-up, it is trading at an attractive 40% discount to proforma net asset value (NAV),” he writes in an unrated report dated Jan 5.
The group’s wholly-owned real estate investment vehicle, Straits Real Estate (SRE), has been a “solid performer” across market cycles.
SRE has so far invested assets of $2 billion globally, and has been The Straits Trading Company’s key earnings driver.
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“SRE has managed to achieve an impressive average return on equity or ROE (2016 -1HFY2021) of 10% through active capital recycling and capitalising on secular growth trends such as rising logistics demand, warehouse retail, and arbitrage/value-add office assets. It holds a diversified portfolio of logistics (29%), retail (34%), and office/business park (31%) assets across key global markets,” writes Natarajan.
The group is also reaping multi-fold returns from its investment in ARA, in which it took a 20.1% stake in 2013 for $294.4 million.
“This investment has proved extremely successful, with ARA’s total assets growing [around] five times since 2014 to $128 billion as of June 2021,” notes Natarajan.
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“In August 2021, Hong Kong-listed ESR Cayman signed a merger agreement with ARA to form APAC’s largest real estate and real asset manager – expected to be completed in early 2022. The agreed total consideration of $1.14 billion for its stake corresponds to a return of four times over an eight-year holding period,” he continues.
In addition, The Straits Trading Company has the potential to see long-term gains from its resources and hospitality business.
“Straits Trading has exposure to tin mining and smelting via a 52% stake in Malaysia Smelting Corp, which is riding on strong tin demand recovery. The long-term outlook for tin mining remains promising, as it is among the key components for electric vehicles, robotics, and renewables,” writes Natarajan.
“The group also has a 30% stake in hospitality group Far East Hospitality (FEH), which should benefit from the post-Covid-19 travel boom. It has a sizeable land bank in Butterworth, Penang, where it plans to develop Straits City, a billion-dollar integrated development,” he adds.
Special dividend likely
The group, which saw a strong 1HFY2021 ended June, saw The Straits Trading Company’s EBITDA surge six-fold to $187 million on the back of the strong performance logged by SRE.
The group has been paying ordinary dividends of 6 cents per share.
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“[This is something] we expect will continue with room for upside,” says Natarajan, of the group’s ordinary dividend payout.
Noting that the group has also dished out special dividends previously upon the execution of major divestments, Natarajan sees room for a special dividend of 10 cents per share in the FY2021, due to the significant gains reaped from the ARA merger. The special dividend, coupled with the ordinary dividend implies a yield of 5%.
That said, risks to the group include “regulatory headwinds across various markets, a sharp rise in interest rates, a resurgence of infections/prolonged pandemic,” he says.
As at 10.30am, shares in The Straits Trading Company are trading 4 cents higher or 1.18% up at $3.43.
Photo: Straits City's website
