Excerpts from analyst's report

JessalynChen3.15CIMB analyst:
Jessalyn Chen (left)

Straco’s share price has taken a beating since it announced its acquisition of the Singapore Flyer, given the market’s expectations that the acquisition would be dilutive to earnings. However, with the Flyer turning in a profit in 4Q, we believe the biggest overhang on the stock has been removed. We also expect Straco to raise ticket prices at the Shanghai Ocean Aquarium (SOA) in FY15 as the revision cycle kicks in.

Straco is trading at 12x CY16 P/E, which we deem an attractive entry point. We raise our FY15-17 EPS by 8-14% to factor in positive profits from the Flyer and the ticket price hike at SOA. Our DCF-based target price rises to S$1.01 (11% WACC), which implies 15x CY16 P/E, still below its recent peak of 17x in Aug 14. We upgrade from Hold to Add, with stronger earnings growth as the key catalyst.

SGflyer8.14Singapore Flyer: Contributed S$1.4m in pre-tax profit in Dec 2014 alone. Photo: CompanyUnderestimated Singapore Flyer profits previously
We previously built in mild EPS dilution from the Flyer in FY15-16 and expected positive contributions only in FY17.

However, Straco’s 4Q14 results revealed that the Flyer contributed S$1.4m in PBT in Dec alone. Since Straco took ownership of the Flyer, it has improved the asset’s yield by:
1) lowering discounts given to tour groups,
2) channelling more walk-in visitors, and
3) streamlining costs (e.g. switching to an in-house marketing team).

We now expect the Flyer to contribute S$7m in net profit annually in FY15-16, based on flat visitor arrival growth (1.4m visitors). These estimates have not factored in potential upside from redevelopment of the retail terminal and ticket sales from new indoor attractions that Straco plans to introduce at the Flyer.

straco_boy1.15@ Shanghai Ocean Aquarium. NextInsight file photo.Potential ticket price hike at Shanghai Ocean Aquarium
We believe the time is ripe for a ticket price hike at SOA. The last revision was in Nov 2011, when the standard ticket price was raised from Rmb135 to Rmb160. Straco typically raises ticket prices every 2-3 years, which means we are likely to see a revision this year.

Our estimates have factored in a 15% ticket price hike in 4Q15. However, we toned down expectations of visitor arrival growth at its aquariums from 9% to 4% given new crowd control measures put in place by the government, which may affect visits during “super peak” periods.

Beaten-down valuations
Straco is trading at 12x CY16 P/E, a significant discount to the 16-29x its peers trade at and its recent peak of 17x in Aug 14. We view this as an attractive entry point ahead of stronger earnings in FY15 when contributions from the Flyer start to flow through.

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