Find out why analysts are downbeat on Straco’s Flyer acquisition

A turnaround is unlikely for the iconic wheel.

The Singapore Flyer has been struggling to attract tourists since it launch in 2008, but Mainboard-listed Straco Corporation yesterday acquired the bankrupted ferris wheel for a total purchase consideration of $140 million.

But analysts are not impressed by the move, noting that the Flyer will only be accretive starting FY17.

“We are not optimistic about this acquisition as a quick turnaround is unlikely and the high operating costs and interest cost are likely to be a drag on margins. The operating structure is similar to that of Straco’s aquariums as the bulk of operating costs are fixed; this means that operational efficiencies can only be reaped above a breakeven point which we estimate to be 1.4m visitors/year,” note CIMB analysts Jessalyn Chen and Kenneth Ng.

Here’s more from CIMB:
Straco announced that it has acquired a 90% stake in the Singapore Flyer, the iconic giant observation wheel, for S$126m. The remaining 10% will be held by WTS Leisure Pte Ltd, a strategic partner in the local tourism industry that owns and operates a fleet of 350 tour buses in Singapore.

The acquisition will be funded via cash and bank debt. Plans for the Singapore Flyer will be revealed when Straco officially takes over in 2-3 months’ time.

The total purchase consideration of S$140m represents a 42% discount to the Singapore Flyer’s initial cost of S$240m. While Straco was bidding against several other parties for the asset, we believe that it would not overpay given its measured approach towards expansion. The asset is expected to bring in positive cash flows immediately but we estimate that it is mildly dilutive for EPS in the near term (2-3% dilution) and will only be accretive in FY17 and beyond as visitor arrivals pick up.

We believe that a turnaround story hinges on 1) stronger visitor arrivals in Singapore, driven by the return of Chinese tourists, 2) channelling tour groups to the Singapore Flyer through its partner, WTS, 3) redevelopment of the area by adding attractions, and 4) better tenant mix.