Straits Trading Review

Straits Trading

I would like to share my opinions on Straits Trading, which was incorporated in 1887. Recently I made a big investment into this company, which kind of against my previous investment policy, that I should not invest too heavily into any single company. However, I found that Straits Trading has a lot of potential as it was transforming itself since approximately 9 years ago. I think that the company will slowly unlock its investment value which will eventually benefit all shareholders.

What is this company about? I will just use the company introduction which can be found on its official website (http://www.stc.com.sg/home.html):

Incorporated in 1887, The Straits Trading Company Limited has stakes in real estate, hospitality, resources and investments that span the Asia Pacific region. It owns an 89.5% stake in Straits Real Estate, a co-investment vehicle that seeks out real estate related investments and opportunities globally. It also owns a 20.95% stake in ARA Asset Management Limited, one of the largest read estate fund managers in the region and has a 30% interest in Far East Hospitality Holdings, an established international hospitality owner and operator. Straits Trading also engages in tin mining and smelting through its 54.8% owned subsidiary, Malaysia Smelting Corporation Berhad, that is dual listed on Bursa Malaysia and SGX-ST.

To be Honest, if we use numbers in AR2016, the share is currently trading at PE 15.1, which is not cheap. The only thing which might encourage investors to buy the shares might be that the share is currently trading below book value. ROE of the company is always below 10 in past 5 years. So why I still want to invest heavily into the company? Let us take a look at the company recent years development, which can be found in chairman statement and business review in the annual report. I mainly focus on business development after 2008, as Straits Trading was acquired by The Cairns Pte Ltd in 2008 and new management team came in during that year.

Recent Years Development

2008

1.  The Straits Trading Company Limited was acquired by The Cairns Pte Ltd, a member of Tecity Group in April 2008. The proposed voluntary conditional cash offer announced on Jan 06, 2008 stated that the offer price per share is $5.70. Another offeror, Knowledge Two Investment Pte Ltd, a wholly owned subsidiary of Lee Latex Limited raised the offer price per share to S$6.55. The Cairns Pte Ltd raised the offer price per share to $6.70 and became the largest shareholder of the Straits Trading Company Limited.

2.       Straits Media ceased to operate billboards at Orchard Emerald Shopping Centre and Market Street Car Park. It managed to develop new sites in Bugis Junction and Arcade in Raffles Place, and the company redeveloped the mode of advertising display at TangPlaza underpass.

3.       The Board believed that that Straits Trading should not remain as passive property owner collecting rent from tenants of the completed residential projects. The completed residential projects have been deemed non-core and will be divested at the appropriate time and suitable prices.

4.       Condominium units at the Group’s Gallop Gables development along Farrer Road, Singapore were leased at market rents with an average occupancy rate of 90% for the year. The Condominium units at along Woolletron Park were leased at market rents with an average occupancy rate of 95%.

5.       There were four completed GCBs remaining under the first phase of the Group’s GCB development along Cable Road and Nathan Road, Singapore. Construction activities continue to slow down as projects are deferred, and construction costs are expected to slide further throughout 2009.

6.       Many Hotels under Group’s management underwent refurbishment. The Group also commenced managing Marque Hotel Perth in 2008.

7.       Efforts to redevelop the Group’s Rendezvous Observation City Hotel site in Perth stalled when the authorities rejected the submitted plans. An appeal was lodged.

8.       In Malaysia, the Group’s joint venture with the Taiko Group to develop bungalows in Ipoh has progressed satisfactory, with nine units sold in the first phase of this project.

9.       MSC and Australia Oriental Minerals NL (the Group’s aggregate 58.5% interest owned subsidiary, with 42.7% held by MSC) has each acquired a 30% stake in the coal development project in Kalimantan, Indonesia.

10.   In H2 2008, MSC proposed a right issue to strengthen its capital base, however due to the GFC, the collapsed in the metal and equity market has led MSC to reconsider this capital raising exercise.

2009

1.       The group sold 42 units the Group owned at Gallop Gables in 2Q2009. Meanwhile the Group started work on two GCBs land plot at Cable Road. In Malaysia, the joint venture with the Taiko Group to develop bungalows in Ipoh got 12 units sold to date in Phase one. In addition, the Group is planning to develop their land parcels in various part of Malaysia and dispose those that are non-core and non-strategic.

2.       The Group repositioned its property division as a niche developer and owner of high-end lifestyle properties.

3.       Straits Trading Building at 9 Battery Road obtained TOP in November 2009. A close to 90% tenancy rate was achieved.

4.       Koba Tin has been extensively developing its gavel pump mining operations, and PT MSC Indonesia and MSC’s 20% owned associate PT Tenaga Anugerah began tin mining operations in 2H2009, with one gravel pump mine operating in Banka Island and three cutter suction dredges for offshore operations.

5.       MSC Board decided that MSC should reposition itself to focus on its original core business of tin. The Group has initiated a divestment programme for all Group’s non tin investments and assets.

6.       The acquisition of 30% stake in the polymetallic mine at Rapu Rapu Island, Philippines was completed at the end of 2009.

7.       At Muara Teweh in Central Kalimanatan, Indonesia, coal mine development was suspended in mid 2009 due to the sharp drop in coal prices and the complex geology affecting the continuing of the coal seams. Mining should commerce in the second quarter of 2010.

2010

1.       The joint venture with Taiko Group launched 47 luxurious freehold bungalows in Ipoh, Malaysia.

2.       Straits Trading initiated development work on two of their five remaining plots of vacant bungalow land in Singapore. The Group also invested in 14 units of The Holland Collection. The Group acquired Chancery Five in the first quarter in 2010.

3.       Consolidated investments into one company, WBL Corporation Limited, and increased the shareholding to 18.9%.

4.       The Group is evaluating how to best maximise its value by divest its investment in AMR. The agreement for the sale of the coal project in Indonesia has been executed and the disposal is expected to be completed in 2011.

5.       Reposition RHG as a branded three and four stars business hotel chain. The refurbishment is still on going.

6.       MSC repositioned itself as a pure tin smelter and producer.

7.       At PT Koba Tin, the production from small scale mining operations ceased altogether. A few new gravel pump mining operations start up in 2010.

8.       The Group divest its 22.1% interest in BCD, a listed gold and copper associate in Australia.

2011

1.       The Holland Collection, Five Chancery and two new GCBs along Cable Road received TOPs.

2.       Existing Marque hotels will be rebranded as Rendezvous.

3.       RHG continues to embarked on several refurbishment projects and implementation of operational improvements including upgrading IT infrastructure.

4.       Straits Media acquired a new site at the underpass at The Sail @ Marina Bay.

5.       MSC completed secondary listing on SGX on 27 January 2011, and straits trading’s shareholding in MSC decreased from 72% to 54%.

6.       MSC commenced operation of a new production unit as its Rahman Hydraulic tin mine in Perak that contributed to an increase in mine output. The smelting and refining facilities in Butterworth is upgrading too.

7.       MSC group announced that the State of Perak has approved the renewal of leases for a longer period up to 2030.

8.       Application of extension of PT Koba’s Contract of Work for another 10 years after 2013 has been submitted.

9.       Indonesia Tin Association imposed an export moratorium on tin shipments from Bangka Island from 1 October 2011.

10.       Another additional production unit was installed at the Group’s tin mine in Perak, Malaysia.

11.   MSC divested its interest in Australia Oriental Minerals NL (AOM), and coal development project in Indonesia.

2012

1.       On 26 November 2012, the group announced that it will increase its stake in WBL Corporation Limited from 17% to 44.58% in 2013 through a share swap with two leading institutional investors.

2.       The Group commenced development on the land parcels along Nathan Road, Singapore.

3.       The Group acquired freehold interest of Rendezvous Grand Hotel Melbourne in September 2012.

4.       The Group signed a Joint Venture Implementation Agreement with Far East Orchard Limited to establish a 30/70 joint venture to pursue and conduct hospitality management and hospitality management, and investment in real estate for hospitality purpose.

5.       Several divestments were made during the year in respect of MSC group’s non tin assets.

6.       MSC announced that PT Koba Tin had received notification from Indonesia government that it was still continuing with its evaluation for the extension of PT Koba Tin’s Contract of Work which expired after 31 March 2013, but permission of production is granted for three months with effect from 1 April 2013.

7.       MSC has agreed to reduce its effective interest in PT Koba to 30% upon granting of a mineral license for another 10 years.

2013

1.       In May 2013, the group sold entire shareholding of WBL to United Engineers for $508.8 million and record a gain of $91.8 million on the disposal.

2.       In November 2013, the group acquired a 20.1% of stake in ARA. The group concurrently entered into a strategic alliance with the private investment company of Mr John Lim to form an 89.5% owned co-investment vehicle, SRE.

3.       In August 2013, the group completed the injection of Rendezvous Grand Hotel Singapore and Rendezvous Gallery into FEHT for S$217 million in cash and S$68 million in units of FEHT

4.       In November 2013, FEHH became fully operational.

5.       In August 2014, FEHH completed a 50-50 separate joint venture with Australia’s Toga Pty Ltd.

6.       MSC has ceased all mining operations in Indonesia and initiated efforts to divest its assets in the country.

7.       MSC’s 30% joint venture company in the Philippines which operated a poly metallic mine also ceased its operation to avoid making losses due to depletion of economic reserves. 

2014

1.       In December 2014, the sale of Straits Trading Building for $450 million was completed.

2.       In July 2014, the group successfully redeemed $225 million of Medium Term Notes and refinance it with lower cost financing facilities.

3.       In 2014, the group acquired 4% of Suntec REIT

4.       In May 2014, SRE committed US$80 million of capital towards ARA Summit Development Fund I

5.       In December 2014, SRE made its maiden acquisition of a retail development in ChongQing, China.

6.       In August 2014, FEHT made its maiden entry into Europe with acquisition of a 50% interest in four hotel properties in Demark and Germany. It also expanded its reach into Australia with the acquisition of two buildings in the CBD of Sydney and Brisbane.

7.       In 2014, MSC exited its Indonesia operations. It acquired 80% stake in SL Tin Sdn. Bhd in March 2014, which has a 15 years mining lease in the state of Pahang.

2015

1.       My Place, located in Nan An District of ChongQing, China construction completed.

2.       In August 2015, SRE acquired 98% interest in an office building located at 114 William Street in Melbourne.

3.       SRE has invested in two real estate funds: Greater Tokyo Office Fund, and ARA Harmony Fund III.

4.       SRE Capital launched its first fund, SAAIF in April 2015.

5.       ARA successfully raised US$325 million in capital commitments for Peninsula Investment Partners.

6.       In October 2015, ARA successfully launched a new privately held REIT.

7.       In December 2015, ARA established the ARA Harmony Fund V

8.       In November 2015, Suntec REIT acquired three floors of strata office space in Suntec City.

9.       In December 2015, Suntec REIT completed the divestment of Park Mall and entered into a joint venture to redevelop the property.

10.   In April 2015, Atbara Holding Private Limited was divested to Haiyi Holdings for S$53.8 million.

2016

1.       SRE realised its first investment since its inception with the sale of 114 William Street for A$161.5 million in November 2016. The divestment yielded a before tax profit of A$21.7 million.

2.       My Place, located in the Nan An District of ChongQing, China completed its renovation anf fit-out in December 2016.

3.       SRE acquired three freehold apartment buildings comprising 396 units in Central Osaka for JPY 6.2 billion, and added another 120 apartment units with Splendid Nambe II.

4.       SRE Capital was appointed as Investment Advisor by Nikko Asset Management Asia Limited for NikkoAM-Straits Trading Asia ex Japan REIT ETF in February 2017.

5.       ARA established ARA Harmony VI to invest in Century Link, a newly completed premium grade commercial property located in the heart of Lujiazui Finance and Trade Zone in Pudong New District, Shanghai, China in October 2016.

6.       ARA announced privatisation in November 2016, Warburg Pincus and AVIC Trust will join ARA after it privatised.

7.       MSC acquired production facility in Kiang Malaysia.

As we can see, the group is slowly transforming itself from an operator to an investor. In early days, we can see that the group runs the business as a property developer. The group develop buildings and sell or rent it out to make profit. In recent years the group use its cash to acquire read estate funds and other buildings instead of building them by itself. In that way, the group can diversify its portfolio which will reduce the risk. The Group did the same thing with its hospitality department too. All these developments were completed in very recent years, so I strongly believe that the Group will be able to slowly unlock the value as most of the properties and hotels are now managed by experienced managers.

I believed that it is very tough to be a new CEO for a company with more than 100 years history. As Ms Chew said during the interview with CNBC Manging Asia, it is very tough. GFC happened during the year she took over the company, which made things worse. I believed that the management team is able to run the company better and safer as they got the experience to survive in GFC.

Take note that we might have to wait for very long time before the market realised the value of the company.

DYODD (: Thanks for reading.