Broker's take: DBS initiates coverage on Straits Trading with 'buy', sees value unlocking from ARA listing

DBS Group Research has initiated coverage on mainboard-listed conglomerate Straits Trading Company with a "buy" recommendation and a S$3.50 target price.

This represents a 50 per cent upside from the counter's Feb 3 close of S$2.33.

Straits Trading shares were trading at S$2.50 before the midday break on Thursday, up S$0.17 or 7.3 per cent. The stock continued its upward trajectory in afternoon trade, surging S$0.38 or some 16.3 per cent to S$2.71 as at 3.27pm.   

"We see compelling value in the company, trading at just 0.6 time price to net asset value, and an even steeper discount to its realisable value," wrote DBS analysts Chung Wei Le and Derek Tan in a research note on Thursday.

Among other things, the analysts believe that there is "significant value to be extracted" upon the potential listing of ARA Asset Management (ARA) this year or next.

ARA's group chief executive officer and co-founder John Lim announced in September 2019 that the Warburg Pincus-backed real estate fund manager is exploring a dual listing that would include Singapore.

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"We see deep value in (Straits Trading's) investments and believe the market is applying a huge discount due to its complex corporate structure," DBS said.

Straits Trading has a 22.1 per cent stake in ARA. It also owns 89.5 per cent of property investment vehicle Straits Real Estate (SRE), a 30 per cent stake in Far East Hospitality Holdings, a 10 per cent deemed interest in Suntec Real Estate Investment Trust, and a 54.8 per cent interest in Malaysia Smelting Corporation.

DBS labelled the ARA investment as Straits Trading's "crown jewel", adding that investors are currently getting the asset "for free". "We expect (Straits Trading) to trade at a higher premium to its past valuation multiples as ARA's listing becomes imminent," the analysts said.

They estimate ARA's current valuation to be S$3.8 billion and Straits Trading's stake in ARA to be worth S$2.06 per share.

In addition, Straits Trading's core real estate business has been churning out stable recurring cash flows, DBS noted.

It added that SRE has been a key growth engine for Straits Trading, increasing its assets under management (AUM) at a compound annual growth rate of 33.9 per cent from S$358 million in FY14 to S$1.78 billion in H1 2020. The growth in AUM came from SRE’s investments, mainly in Australia and Japan, DBS said. 

Despite the Covid-19 pandemic impacting Straits Trading's other businesses, SRE's portfolio was the most resilient within the group, contributing 81 per cent of its earnings before interest, taxes, depreciation and amortisation in H1 2020, the analysts noted. 

"We estimate SRE's portfolio initial yield to be about 6.5 per cent, and on high-quality, diversified assets. Its assets are diversified across six geographies (Australia, China, Japan, Malaysia, South Korea and the UK) and four sectors (retail, residential, office and logistics)," Mr Chung and Mr Tan said. 

They added that Straits Trading remains on track to grow its assets under management to S$2.4 billion by 2022.