As a conglomerate, Mainboard-listed Straits Trading Company (STC) S20 appears to have a finger in every pie. It owns stakes in companies across three sectors: resources, property and hospitality. Each faces its own challenges and opportunities, and each is at a different point of industry cycles. Taken together, STC’s FY2023 has proven more challenging than usual.
On Feb 27, STC posted a $28.6 million a loss after tax and non-controlling interests for FY2023 ended Dec 31, 2023, reversing from earnings of $551.3 million in FY2022. The decline was primarily attributable to a high base in FY2022 — coming from the disposal of ARA Asset Management (ARA) in January 2022 — and partially mitigated by lower net fair value losses from investment properties.
The group’s ebitda fell 87% y-o-y to $79.5 million. Excluding the one-time net gain of $642.1 million from the ARA disposal, however, ebitda would have increased by $108.2 million y-o-y.
STC blames the “challenging global business environment” that was “weighed down by elevated cost of funding and macroeconomic uncertainty” for the weaker numbers. According to STC, the high interest and capitalisation rate environment weighed on the valuation of real estate assets. With fewer transactions, it faced a “challenging year” for divestment and capital recycling.
That said, STC executive chairman Chew Gek Khim says its “diversified business strategy” has helped it navigate challenges in the current business environment. “With a strengthened balance sheet, we will continue to evaluate investment opportunities to deliver sustainable business growth.”
Across STC’s three segments, resources ebitda fell 13.6% y-o-y to $47.3 million, as its separately-listed associate Malaysia Smelting Corp (MSC) booked lower average tin prices even though it sold larger quantities in FY2023.
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Meanwhile, property posted an ebitda loss of $3.6 million in FY2023, narrowing from a loss of $63 million this time last year.
Finally, hospitality ebitda increased to $2.7 million in FY2023 from $0.8 million the year prior.
The “others” segment posted an ebitda of $33.1 million in FY2023, up from an ebitda loss of $21.2 million in FY2022. This segment comprises group-level corporate and treasury services, and securities and other investments, including the group’s 14.3% stake in SDAX Financial, a digital securities investment and trading platform licensed by the Monetary Authority of Singapore.
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Loss per share for the FY2023 and 2HFY2023 stood at 6.4 cents and 9.7 cents respectively on a diluted basis. Despite the losses, STC is maintaining its interim dividend at 8 cents per share. This will be paid on July 2.
STC’s shares, which closed at $1.46 on March 5, are trading at a discount to its net asset value per share of $3.26 as at Dec 31, 2023.
Resources
MSC, traded on both the Singapore and Kuala Lumpur exchanges, is 52% held by STC. While MSC accounted for only 12% of the group’s $3.44 billion in assets as at Dec 31, 2023, it dominated STC’s FY2023 ebitda, contributing more than half of the figure.
MSC posted net profit of RM85.1 million ($24.18 million) for FY2023, down 13.5% y-o-y. This nearly mirrored the 13.6% y-o-y fall in tin prices.
Over in Penang, MSC’s Butterworth’s smelters, which started burning in 1902, may be extinguished soon to make way for the group’s Straits City integrated development.
A new smelter is being built at Pulau Indah in Selangor, which can be operated 30% cheaper and create a smaller carbon footprint, along with additional processing capacity for future ramp-up of this business.
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Eric Teng, STC’s group COO, told The Edge Singapore in a 2022 interview that decommissioning and redeveloping the land will take three to four years. At a March 1 briefing, Teng says the group has been working on preparing the new plant at Pulau Indah in hopes of a smooth transition in operations.
Property
STC’s property segment is relatively more complex. It includes full ownership of the group’s various arms, such as corporate and operational unit Straits Developments, fund management unit Straits Investment Management and investment vehicle Straits Real Estate (SRE). It wholly owns STC Property Management, the developer of the Straits City project in Penang, and also a close to 3.9% stake in the ESR Group.
Real estate represents the bulk (74%) of STC’s assets, totalling some $2.542 billion as at Dec 31, 2023. This includes assets worth some $336.1 million from the ESR Group and some $264.5 million in its own property portfolio.
Also on its balance sheet are logistics properties in South Korea, retail and mixed-use developments in Malaysia, business and warehouse retail parks in the UK, office and logistics assets in Australia and retail properties in mainland China — worth some $1.677 billion in total.
In FY2023, 89% of these assets were operational, while 11% were under development.
After four years of acquisitions, STC took FY2023 to “optimise the performance of the portfolio”. SRE has lowered the fair values of certain investments owing to higher cap rates in some countries. Compared to a property valuation of some $1.356 billion, STC logged $66.8 million in rental and related income in FY2023.
SRE says it continues to grow recurring income from its investment properties. In particular, the Gloucester Business Park in the UK secured several lease renewals and achieved an average rent reversion increase of 36%. Rental income also remained “resilient” at $66.8 million, 21.4% higher y-o-y.
Closer to home, Phase 1 of STC’s Straits City project in Butterworth, Penang will open in 1H2024. The 343-room Crowne Plaza Penang Straits City is set to open in June with a retail podium and a “concept centre” that will showcase the masterplan of the 40-acre integrated development.
Teng, who wears another hat as CEO of Straits Developments, expects “healthy” occupancy at the upcoming hotel, with tourists returning from Hong Kong and mainland China.
Taking ESR private
Shareholders of the ESR Group are reportedly exploring a privatisation of the Hong Kong-listed property group. In reply to a question about market talk on the potential privatisation of ESR, Yeo Eng Kwang, deputy chief investment officer of Straits Developments, says STC holds “just under 3.9%” of shares and the group “obviously” wants maximum value.
Nonetheless, he says buyers “may not pay out maximum value”. “We welcome developments if there are options to take it private. We definitely work with the other stakeholders as to what kind of value we can get. Of course, we understand there are merits and demerits to being taken private.”
STC will look at the situation holistically, he adds. “The value that we can get, versus the time period of capital [that] might be tied up in a private venture, versus the alternatives of what we can do with the capital; we will assess from there and determine what’s best for the firm.”
Hospitality
STC’s hospitality exposure comes from a 30% stake in Far East Hospitality Holdings (FEHH), a joint venture with the Mainboard-listed Far East Orchard O10 (FEO). The hospitality segment is STC’s smallest in terms of FY2023 ebitda and assets.
FEHH now manages close to 100 properties with over 16,600 rooms in 10 countries. In FY2023, FEHH opened six hotels with over 750 rooms. Looking ahead, the hotel owner and operator will open some 600 rooms this year, across Australia, Germany and Singapore.
This is part of FEO’s global plan to manage 25,000 rooms by 2025, which it first announced in 2021. Teng declined to comment on the feasibility of this plan, but hints at upside potential as the global travel industry is “really not 100% out of Covid-19 yet”.
Cash holdings
In February 2023, STC completed a $370 million exchangeable bond issue, which was 1.9x subscribed. The bonds carry a 3.25% coupon rate due on Feb 13, 2028, and are exchangeable into ordinary shares of ESR Group at an initial exchange price of HK$22 ($3.77) per share. STC says the bond issue offered greater financial flexibility and lower cost of funding.
As at Dec 31, 2023, cash and cash equivalents stood at $458.1 million, nearly double that of $251.7 million logged the year prior.
STC says its holdings will enable it to conduct active capital recycling, enhance real estate operations through value-add strategy and seek out optimal risk-adjusted returns in the use of capital.
In January, STC issued $130 million of unsecured fixed rate notes under its $500 million multi-currency debt issuance programme, which was established in October 2011. The notes will mature on Jan 24, 2029, and bear an interest of 4.7% per annum.
“We are always ready if we ever need to seize opportunity and redeploy accordingly, across any of our businesses,” says Teng.
