DBS Group Research analysts Chung Wei Le and Derek Tan have initiated “buy” on The Straits Trading Company (STC) with a target price of $3.50.
The target price represents a 50% upside on the company’s last closed price of $2.33 on Feb 3.
To Chung and Tan, there is “compelling value” in the company with it trading at just 0.6 times price-to net asset value (P/NAV), and at an even “steeper discount to its realisable value”.
“We believe that STC is a deep valued stock and that the market is applying a huge discount due to its complex corporate structure,” they write in a Feb 4 report.
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“With the impending listing of ARA Asset Management (ARA) in 2021/2022, we believe STC is positioned to benefit significantly from the unlocking of value in ARA,” they add, referring to the announcement made by ARA’s group CEO John Lim in September 2019, that he was exploring a potential relisting of ARA.
The planned relisting of ARA in 2021/2022 puts it at a valuation range of between $4 billion to $4.5 billion, with a current attributable value to STC at about $2.06 per share.
“This comes ‘free’ at the current price,” say the analysts. “We expect STC to trade at a higher premium to its past valuation multiples as ARA’s listing becomes imminent.”
ARA isn’t the only business investors are getting for “free” at STC’s current share price,” note the analysts.
STC’s core real estate business, Straits Real Estate (SRE), which STC has an 89.5% interest in, is estimated to be worth close to STC’s current market capitalisation.
SRE also been churning out stable recurring cashflows and has amassed a portfolio of quality commercial and logistics assets with an initial yield of 6.5%, which could compress given the low interest rate environment, according to Chung and Tan.
SEE: Straits Trading: From tin mining and smelting to property investing and beyond
The way the analysts see it, STC remains on track to grow its assets under management (AUM) to $2.4 billion by 2022.
On STC’s valuation, the bulk of it stems from SRE at $2.26 per share and ARA’s $2.06 per share.
However, key risks to the counter include revaluation losses on its properties, as well as disruption to Malaysia Smelting Corporation (MEC) and Far East Hospitality Holdings (FEHH).
As at 2.41pm, shares in STC are trading 32 cents higher or 13.7% up at $2.65.