Many companies has the problem of finding getting capital to invest but not Straco Corporation. It has the problem of reinvesting. Acquisition of Singapore Flyer is a case of curse of good cash generating company or smart capital allocation? We will know soon.
My simple model of outcome says Good, average and lousy.
Good – Generating the same kind of return that matches existing businesses. Probability is very low as the current businesses are hard to come by. In order to achieve the same, cost of the asset must be low, next utilization must move up and lastly, ability to increase price not discount or lower ticket price. S$60 a ride anyone? In 2025? No? I doubt it is happening.
Average – Generating 10 to 15% ROE. A big possibility. Has to trust the management knowing what to do. Shouldn’t their spreadsheet approved it?
Lousy – Never write lousy off. Especially when sitting with lot of cash.
It is easier to get lousy outcome than good one.
Not happy with 10 to 15% kind of return except for a reason, when managed well, Singapore Flyer opened the door for Straco, changed their future where an unknown operator become some operator and able to fight in another stage. The future look brighter.
So it is kind of stupid or crap to find and/or spread that Singapore Flyer is profitable except to find way to profit from movement of share price. Anyway the number say it is ebitda profitable and red at ebit. But it doesn’t mean much to me until Straco is able to operate it well, and hopefully don’t be lousy.
Anyone say that Straco chooses to or has to depreciates the investment property? Now there are more ways to look at it if you are able to flip number well.