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Straits Trading's fifth act

Jovi Ho
Jovi Ho6/30/2022 08:58 PM GMT+08  • 16 min read
Straits Trading's fifth act
The Singapore Exchange-listed Straits Trading and its dual-listed subsidiary, Malaysia Smelting Corp (MSC), on May 17 unveiled the master plan of Straits City, which they described as their flagship “smart and sustainable” integrated development in Penang
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Aspiring to become the next Blackstone, the 135-year-old conglomerate amps up hospitality and real estate investments

Hotels the world over have faced a distressing two years and counting. If the recent privatisation offer for Frasers Hospitality Trust is anything to go by, some hospitality names are throwing in the towel as a full reopening, for many countries, is taking longer than expected.

So, imagine the raised eyebrows when Straits Trading Co announced that it had built a seafront hotel in Malaysia. “Even the analysts said: ‘I beg your pardon? You mean you’ve built a hotel?’” recalls Eric Teng, CEO of Straits Developments, part of Straits Trading, in an interview with The Edge Singapore.

The Singapore Exchange-listed Straits Trading and its dual-listed subsidiary, Malaysia Smelting Corp (MSC), on May 17 unveiled the master plan of Straits City, which they described as their flagship “smart and sustainable” integrated development in Penang, Malaysia.

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Straits City is one of Straits Trading’s many property-related businesses. In addition to its 52% stake in MSC, Straits Trading has investments in a plethora of property-related themes, and the company can be described as an asset and property conglomerate of sorts.

Through subsidiaries and joint ventures, Straits Trading has investments in hotel managers and hotels through a 30% stake in privately held Far East Hospitality Holdings (FEHH); property funds through Straits Investment Management; investments in property development through joint ventures and partners under its wholly-owned Straits Real Estate (SRE); a 4.8% stake in ESR Cayman and 2.8% in Suntec REIT; and 14.3% in SDAX, an integrated digital financial services platform.

Straits City and a new growth triangle

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According to Teng, Straits City is an integrated development with a mix of residential, retail, hotel and commercial components. He expects the 16.19ha of prime seafront land in Butterworth to be fully developed by 2038.

Butterworth is the largest urban town in the city of Seberang Perai, on the mainland part of the state of Penang. It is located about 3km east of Penang’s capital city, George Town.

North Butterworth Container Terminal, a 15-minute drive from Straits City, was gazetted as a free trade zone on Feb 1 last year. “Straits City is poised to benefit from the positive spillover effects from Indonesia-Malaysia-Thailand Growth Triangle and Belt and Road initiatives,” says Straits Trading in its FY2021 results briefing.

According to MSC group CEO Patrick Yong, the company had already owned and occupied about 5.58ha of the land, where its old tin smelting plant is located. Speaking at a press conference after the topping-out ceremony of the Straits City development, Yong says the smelter is still operational but at the “tail end” of its use. “We are in the process of moving and it takes time, especially because of Covid-19, we lost two years… We are doing the cleaning up.”

The smelting works will eventually move to Klang. But the decommissioning and redevelopment of the immediate area where the plant sits on will take “anything from three to four years”, says Teng.

MSC became a subsidiary of Straits Trading in 2005 after an unconditional takeover by Straits Trading Amalgamated Resources, a wholly-owned subsidiary of Straits Trading. The first phase of development for Straits City will include a 23-storey four-star hotel with a net lettable retail area of about 3,885.48 sq m and a gross development value (GDV) of about RM250 million ($78.77 million).

The hotel, scheduled to open in 3Q2023, will have 343 rooms, a retail podium and meetings, incentives, conferences and exhibition (MICE) facilities.

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Teng sees this development as a way to unlock the value of the land, and reflecting “the belief in the potential of Penang and Butterworth — of Penang and Malaysia”.

“People say all the hotels have closed down. We say it’s good news that we are the only ones that are opening. People will say we’re showing off, we’re laughing at people. But generally speaking, that’s the way of life,” says Teng.

According to him, the plans for the redevelopment of Butterworth began “way back in 2011”, and are expected to last for some time. “These are big plans; they won’t happen overnight.” In the broader scheme of things, a decade-long gestation for the Butterworth project will not seem too long.

After all, Straits Trading has been around since 1887, making it one of the oldest companies in Singapore and Malaysia.

Hospitality play

The new Straits City development joins Straits Trading’s growing stable of hospitality names, owned through the conglomerate’s 30% stake in FEHH.

Formed in 2013, FEHH is 70% owned by Far East Orchard, a listed company under the Far East Organisation.

“There’s no doubt that the entire [Straits Trading] group went through pain [during the pandemic]. FEHH is a 70-30 joint venture; we will take the joy as well as the heat,” says Teng.

“But we haven’t spent the past two years doing nothing,” he adds.

Indeed, Straits City is not Straits Trading’s first pandemic-era move within the hospitality sector. FEHH acquired and rebranded the Far East Village Hotel Ariake in Japan in July 2020; then opened The Clan Hotel Singapore and Quincy Hotel Melbourne in 1Q2021; and the Oasia Resort Sentosa in September 2021.

Come September, FEHH will open the Vibe Hotel Singapore Orchard, as part of what the company terms an “Australian pivot”.

To that end, FEHH will bring Australian hotel brands Vibe Hotels and Adina to Singapore through the rebranding of the existing Elizabeth Hotel and serviced residence Regency House respectively.

Prior to the pandemic, Australia was one of Singapore’s top-five inbound markets. Hence, it is a “natural key target market”, says Arthur Kiong, CEO of Far East Hospitality. “The return of the Kangaroo route, which refers to the flight paths between Australia and the UK with stopovers in Singapore, also offers us an opportunity to not only encourage more stopovers, but also to attempt to lengthen their stay with new experiences.”

“The two new brands that we are bringing into Singapore will provide an Australian twist to what Singapore, as a destination, has to offer,” Kiong adds.

The aggressive expansion is part of the company’s 25,000 rooms by 2025 global plan. According to Straits Trading, FEHH currently operates a combined portfolio of over 18,000 rooms across 105 hotels and serviced residences in nine countries.

Granted, Australia has always been a focus for FEHH since its founding in 2013. Through its wholly-owned subsidiary Far East Hospitality Investments (Australia), FEHH entered a 50- 50 joint venture with Australia’s Toga Group to form Toga Far East Hotels that same year.

Prior to 2013, Straits Trading owned Rendezvous Grand Hotel Singapore and four Australian hotels. “We then decided to scale the business to make it sustainable,” says Teng. “We scaled by amalgamating with Far East, which also happened to be very keen to expand into Australia and New Zealand at that time.”

He adds: “So, it was a marriage that was timely for both partners, which have the same kind of background — both are owned by family groups.”

Post-JV, Straits Trading received $68 million of Far East Hospitality Trust (FEHT) units and cash of $217 million from the injection of Rendezvous Grand Hotel Singapore into FEHT.

As commercial flights return to the skies, Teng is optimistic about the tourism recovery. “There will always be demand for [hotels], unless people stop paying for holidays and people stop travelling.”

He maintains that the hospitality arm has a place in the broad conglomerate that is Straits Trading. “The fact that hospitality has been so badly hit for more than two years, and yet we survived, demonstrates that the conglomerate investment positioning is correct, or we would already be in trouble.”

Fundamentally, Straits Trading is a conglomerate investment company, and this business direction will remain, says Teng. “We don’t see it changing yet. Why? Because it has served us very, very well. The diversification has proven [effective] through many cycles, many crises and effectively, two world wars. We are what we are today.”

135 years

How did a tin-mining company find itself in the hospitality and tourism circles? The legacy of Straits Trading stretches back 135 years, a history the company has divided into five periods.

Incorporated in 1887, Straits Trading’s diversified operations and financial interests span resources, property and hospitality.

The first 60 years of Straits Trading were focused on resources, explains Teng. The second period, from the 1960s, saw it acquiring properties.

Straits Trading entered the hospitality sector in the 1990s, expanding its reach into the conglomerate’s three key business segments today.

“Interestingly enough, time compression kicked in. Everything moves faster now; no longer will we take 60 years to do something. Now, it is almost every 10 years,” says Teng.

The fourth era of Straits Trading was a “critical phase” of the company’s growth, says Teng, though some may consider it fraught. It started just over two decades ago.

Singapore’s banks were not as badly hit by the turmoil of the 1997–1998 Asian Financial Crisis compared to their regional counterparts, but the Monetary Authority of Singapore wanted the banks here to divest their non-banking assets — largely property holdings. In the case of Oversea-Chinese Banking Corp (OCBC), this included a portfolio of other companies ranging from department store Robinsons to car distributor WBL Corp and, of course, Straits Trading.

This set the stage for a dramatic takeover. In 2008, Chew Gek Khim, the granddaughter of a former OCBC Bank chairman, Tan Chin Tuan, entered a bidding war for Straits Trading against the Lee family that controls the bank.

Chew, via her family’s vehicle, Tecity, managed to gain a controlling share of 89% of the company.

As Chew told Singapore Exchange in a 2019 interview: “I tried to buy Robinsons but failed, I tried to buy Raffles Hotel and failed as well. Straits Trading was the only one I got.” The department store and hotel were companies formerly on OCBC’s balance sheet.

Chew was appointed non-executive and non-independent chairman of Straits Trading in 2008, and became its executive chairman a year later. The 2010s were then dedicated to “refocusing the businesses into scalable assets and sustainable growth engines”, says the company.

This included purchasing a 20% stake in the former ARA Asset Management in 2013, which further accelerated Straits Trading’s in properties and adjacent activities.

Last year, ARA Asset Management, which holds and manages a portfolio of assets, such as Suntec REIT, was acquired by ESR Cayman for $5.2 billion.

With the deal completed on Jan 20 this year, the rollover of Straits Trading’s 19.0% effective interest in ARA made for a total consideration of $1.14 billion, comprising $134.8 million in cash and 214.7 million shares in ESR Cayman valued at $1,005.7 million. Back then, Straits Trading had invested $294 million for its stake in ARA Asset Management.

As the dust settles, Straits Trading will stay invested in ESR Cayman, which has a diversified portfolio of assets including logistics properties that are seeing firm demand. “Chairman [Chew] has gone on record saying that she believes this part of the business will grow in the Asia Pacific,” says Teng.

“As a conglomerate investment company, we play the long game,” says Straits Trading. “Yet, at the same time, we may adjust our stake in ESR if we need to look at other opportunities.”

Likewise, Straits Trading’s stake in Suntec REIT remains “a good cash flow generating asset for the company”, it adds. “The stake is also strategic for us and will continue to remain so.”

Moving forward, Straits Trading hopes to “one day, be like Blackstone”, says Teng, referring to the American alternative investment management company.

“We had a very successful so-called 4.0 in the decade following 2010,” says Teng. “Obviously, the decade was marked by the global financial crisis. Then, this decade we face Covid-19.”

“We’re obviously a bit hindered, but we have demonstrated that by being a very resilient company over the past 135 years, we have managed to stay relevant and focused in managing crises,” he adds.

Straits 5.0

The “Straits 5.0” phase, as Straits Trading calls it, will focus on converting assets into investment products and platforms for new growth engines.

This includes focusing on new economy assets via Straits Real Estate (SRE), with a goal to grow invested assets from the $2.3 billion as at end-FY2021 (ended Dec 31, 2021) to $3.5 billion in future.

In a November 2021 investor presentation, SRE, a wholly-owned subsidiary of Straits Trading since April 2021, said it will “double down” on the Asia Pacific logistics sector, choosing Australia and South Korea as key markets with an initial commitment of $220 million.

In Australia, SRE has established a development and ownership platform with local developer Commercial & General on an 80-20 basis.

As of June 2021, SRE has eight properties across South Australia and Victoria worth A$290.4 million ($280.77 million), with 99% occupancy for operating assets and a weighted average lease expiry (WALE) of 8.3 years. According to Straits Trading, its “build-to-suit portfolio” involves pre-commitments from blue-chip tenants to minimise risk.

Inclusive of two South Korean logistics assets, SRE aggregated a portfolio of 10 properties across the Asia Pacific with total assets worth $516.7 million as of June 2021, “representing a 39% uplift since December 2020”.

In the UK, SRE is scaling up its warehouse retail portfolio, committing up to GBP60 million ($101.77 million) into an investment vehicle to acquire warehouse retail park assets in key cities.

Warehouse retail parks are open-air retail formats commonly found in “city fringes and out-of-town locations with large residential catchments”, says Straits Trading. They feature expansive parking lots with direct access to storefronts, which SRE believes facilitates social distancing for shoppers.

“As most tenants are discount retailers, warehouse retail parks have remained competitive against online formats,” says Straits Trading. “The emergence of ‘click and collect’ helps to draw additional foot traffic to the properties and often result in additional on-site sales.”

Besides the three countries mentioned, SRE is also present in Japan, Malaysia and China. Retail, industrial and office properties each make up about 30% of SRE’s portfolio.

On June 29, the company announced further expansion into the UK, with SRE spending GBP130 million to acquire a portfolio of nine office and industrial buildings with a net lettable area of 522,000 sq ft, and six plots of development land totalling 830,000 sq ft.

According to SRE CEO Desmond Tang, the acquisition of this portfolio — within the Gloucester Business Park — will help generate a “balanced blend” of recurring income at an attractive yield, and also potential upside from development.

Straits Trading Shareholders’ Club

The sheer breadth of Straits Trading’s portfolio may appear intimidating to some, particularly new investors. To better explain these operations outside of AGMs, Straits Trading hopes to foster closer ties through the Straits Trading Shareholders’ Club, another of its Straits 5.0 initiatives.

Launched in September 2021, the Shareholders’ Club seeks to engage active shareholders as a community, enhance the level of knowledge in Straits Trading’s businesses and to enable co-investment opportunities. It is said to be the first of its kind in Singapore among listed entities.

Registration is free and open to shareholders holding at least 100 shares. Registered club members will have access to experiential events, expert insights webinars and investment product launches.

Teng notes that there was some apprehension at first. “People were very concerned whether we were marginalising those who are not members of the club.” He explains that registration simply helps indicate interest among Straits Trading shareholders, “to avoid spamming”. “To be honest, the ambition is that each and every shareholder should be a registered shareholder of the club… We would be happy to also educate you about our investments so you understand what we are investing in.”

Perhaps the biggest draw for registered shareholders who are also accredited investors is that they enjoy co-investment opportunities in real estate securities and participatory notes.

The first two of such offerings include fractional ownership of a Good Class Bungalow located at Cable Road in Chatsworth Park, and a residential property located at Woollerton Park in Gallop Green.

Minimum investment amounts range from $200,000 to $500,000, with no lock-in period. “We hope to actually grow with our co-investors, our shareholders; we see an opportunity for them to participate in the things we do,” says Teng.

He adds that “other new products” will be offered soon. “When it comes out, you will see that we are doing a lot more.”

According to the company, registered shareholders can also spend time with Straits Trading’s management team. “It’s done outside the AGM so you have another opportunity to meet us in the flesh,” says Teng.

One such touchpoint was a members-only talk on June 8 at the Asian Civilisations Museum. The two-hour event welcomed registered shareholders to speak with Straits Trading management, and featured a talk by Professor Benjamin Horton, director of the Earth Observatory of Singapore.

Says Teng: “Last but not least, I think it’s important that shareholders stay invested in the company, not just for the share price, not just for the dividends, but to look at the shareholder opportunities for them.”

Rising cost of business

For its FY2021, the group reported a record ebitda of $401 million, up threefold from a year ago. Straits Trading’s profit after tax and non-controlling interest (patnci), meanwhile, was up 355% y-o-y to $234.3 million in FY2021.

The group attributes this to higher contributions from SRE, which enjoyed gains from the portfolios of Australian and South Korean logistics properties.

Straits Trading’s real estate business is the main contributor to earnings. This segment posted patnci of $232.7 million in FY2021, compared to $69.8 million a year ago.

While shares in Straits Trading reached a 52-week high of $3.78 in late October 2021, its share price has since moderated to $2.88 as of June 28, with a market capitalisation of some $1.26 billion.

Looking ahead, rising rates may weigh on Straits Trading’s wide-ranging segments. “The entire business will be affected; the cost of business will be definitely higher,” says Teng.

He adds: “Needless to say, I think the only way we can mitigate this is to be very prudent, as well as make sure that our business remains healthy. Actually, the best way to circumvent high interest rates is to ensure that your business returns must still be there.”

The company is an astute capital allocator, says Teng. “We are able to redeploy and recycle capital with a very clear objective in terms of the risk, reward [and] returns; we stick to this principle. If interest rate hikes affect us, then we will manage it based on this strategy that we have.

Photos and infographics: Albert Chua/The Edge Singapore, The Straits Trading Company, The Clan Hotel

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