Marina mania

SUTL Enterprise, $BHU.SI investment thesis

If you've been following me for a while, you've probably noticed that my investing strategy doesn’t revolve around „looking for high-quality". You'll rarely see me discuss moats or long runways of high ROIC growth. Partly because I don't trust my ability to identify those kinds of businesses before anyone else, and partly because I don't like overcrowded setups where a lot of future assumptions have to be right for me to make money.

Hence, I don't mind buying disgust such as dying newspapers, indebted hotels, or oversupplied office space in more overlooked parts of the market. As long as it gives me a sufficient margin of safety with decent capital allocation. 

Paying up for growth or quality makes me uncomfortable, so I usually avoid it.(Un)fortunately, as investors, we have the duty to keep an open mind at all times and not dismiss some ideas very lightly.

Well…a few weeks ago, I came across one business that didn't fit my usual bill and was instead one of high quality. So in this article, I'll walk you through what exactly I consider to be a „wonderful business at a fair price."

$BHU.SI

SUTL Enterprise is a family-owned marina business out of Singapore. The main appeal of it is that more than 90% of its business comes from owning (lease expires in 2034) and operating one of Asia's best marinas;

ONE°15 Sentosa Cove, Singapore

ONE°15 Sentosa Cove is located on the resort island Sentosa in southern Singapore, where the wealthiest Singaporeans like to spend their time gambling, golfing, networking, chilling on the beach, or relaxing on their yachts.

For starters, here are some facts you should know about “Singapore’s Monte Carlo” to gauge how much of a crown jewel this marina really is:

• consistent OCF profitability since 2008 (opened in 2007)

• numerous prestigious industry awards, including the Eight-Time Winner of Asian Marina of the Year, the first Platinum Gold Anchor marina in Southeast Asia, and International Marina of the Year 2023 by MIA (the highest accolade in the industry)

• one of the few marinas in Asia with full-boarding facilities to accommodate superyachts of up to 200 feet within the confines of deep and secure waters

• infrastructure reconfiguration in 2021 allowed them to become the largest superyacht hub in the region with 32 berths

• only private marina in Singapore to have Customs, Immigration, Quarantine (CIQ) facility 

• lifestyle destination - infinity pool, gym & spa, restaurants and bars, hotel rooms, meeting and ballrooms, tennis courts, arcade, events, etc.

• close to full occupancy all year round, 272 berths

• 2016 analyst presentation had this to say: memberships are currently full, and all the berths are taken up, with 2.5 years waiting list

If you would like to do more scuttlebutt, without paying for a plane ticket, Insider has a great (non-biased) piece from May of this year

https://www.insider.com/singapore-sentosa-cove-one-marina-hotel-yacht-club-review-2023-5

ONE°15 Sentosa Cove

Now, to best illustrate how the business model works, please read the following slide:

In essence, what you have is a natural monopoly with no proper alternative for yacht owners (they cannot just re-dock their 150-foot yacht in a no-name marina nearby). Management that can easily exercise pricing power due to a marina's full occupancy in a part of the world where there is a shortage of quality berthing spots.

And then sell products/experiences at ~80% gross marinas once they lure wealthy clientele to their exclusive location.

Moreover, the business has float because its membership program requires a non-refundable entrance fee, which costs as much as 60k SGD, and has around 3800 members (there is no disclosure in the annual report and I found the cost figure while browsing the Internet, so please double-check me). Also, depending on the package, you need to pay either a 2-month or 10% deposit fee in order to berth at Sentosa Cove.

In the end, you're left with a floats and moats" type of business with negative WC, multiple increasing recurring cash flow streams and likely extremely high customer retention due to it being one of the highest-quality berthing spots in all of Asia with waiting lists as long as 2.5 years.

Plus – a business catering to the needs of superyacht owners is definitely recession-proof.

Another, much smaller pillar of SUTL's business is operating marinas for other interested parties.

Management contracts

As Sentosa Cove was one of the first movers among lifestyle marinas and management's expertise and customer-focused approach served as an example to others in the industry, ONE°15 has established itself as a premiere brand. Other marina owners took note and wanted to provide the same level of quality service to their customers. Management contracts with third parties started happening. SUTL Enterprise currently has two contracts in place: ONE°15 Brooklyn Marina and ONE°15 Nirup Island (Indonesia), which just opened in July 2023. Furthermore, with its One15 brand, SUTL Enterprise can leverage its trademark to negotiate better terms for management contracts. 

Unfortunately, they don't disclose the terms of each individual management contract, but it usually includes a minimum flat fee and a variable component based on performance. For example, the contract for ONE°15 Brooklyn had a fee of 5% of the annual gross revenue. These types of deals are a great way of growing the ONE°15 brand quickly, in an asset-light way without taking on much risk.

Going forward, there’s a pipeline of three management contracts for marinas that are in various stages of completion:

1. ONE°15 Marina Logan Cove Zhongshan, China

2. Indonesia Navy Club (Jakarta)

3. ONE°15 Marina Taihu Lake (Suzhou), China

Now that we’ve covered the attractiveness of Sentosa Cove asset and SUTL’s straightforward business model, let’s look at who's in charge. 

Tay family

SUTL Enterprise is 55% owned by SUTL Global, which is 51% owned by the Chairman and Chief Executive Officer (of both companies), Tay Teng Guan Arthur. Also, Tay Teng Hock, brother of Arthur Tay, owns approximately 14.8% of SUTL Global. The remaining shares are held by six other siblings.

Tay family is a well-connected Singaporean family and is mostly recognized for the distribution of many global consumer/lifestyle brands throughout Asia. 

Although most of SUTL’s success comes from making sure other brands succeed, in recent years they’ve declared a desire to build brands of their own. I found multiple news articles indicating that ONE°15 Marina is the brand that Arthur Tay is "by far the most proud of," and by taking SUTL into the marina industry, he’s "turned one of his passions into a business." These remarks, together with his skin in the game, give me enough confidence that operating SUTL Enterprise isn’t just a side project for Arthur and his family.

We know the Tay family is proud of the brand, but that’s not going to make us money. Let’s rather have a look at what price the market is offering us $BHU.SI

Margins of safety

For starters here’s a snapshot of its most recent balance sheet:

The first thing I’d like to highlight is the negative EV. The company has a market cap of 48M, 25.7M in cash and another 29.6M in credit-linked notes with the underlying asset being treasury bills issued by MAS / Singapore Government (maturity of less than or equivalent to a year) compared to 6.2M in debt.

Secondly, my opinion is that this book value should be adjusted (accountants, let’s argue in the comments). As I’ve previously mentioned, the deferred membership income line is linked to entrance fees collected from members of ONE15 Sentosa. That one-time membership sale occurred about 20 years ago and the amounts collected are non-refundable.

SUTL isn’t required to pay any of these back and I wouldn’t classify it as a liability. The adjusted book should look like this:

book of 57.5M

+ current deferred MI of 3.7

+ non-current deferred MI of 39.6

= adjusted book of 100.8M

Meaning, currently, the market is offering you SUTL Enterprise for less than 0.5xbook and less than the value of its net cash (cash - debt).

If you’re not convinced, let’s try to handicap it even further.

In 2004–2007, Arthur Tay invested over S$70 million to get ONE°15 Marina Sentosa Cove up and running. Due to current building material costs, the uniqueness of the location, and the inflation that has occurred in the meantime, I’d argue a private buyer would have to pay at least twice that amount to build it up today. I mean…I don’t want to be the guy who gives zero credit to depreciation that happened in the meantime, but I think it wouldn’t make sense not to adjust PP&E upwards. Adjusted book is even higher then, you get to decide by how much.

Moreover, there’s no risk of a company turning unprofitable all of a sudden, and you’re paid to wait. SUTL has paid a 0.05 dividend in 2022 on a 0.55 share price. This is a 9% dividend yield on a less than 50% payout ratio in an industry environment that is expected to grow "from strength to strength." (~10K)

Further, if we value the company on earnings instead, based on my rough estimate, in the years going forward, SUTL will do anywhere from 5-9M in owner earnings (bear-base case scenario) - depending on the revenue base as there is significant operating leverage inside the business.

That’s 6–10 times earnings for a predictable business of this quality with significant asset downside protection. 

P.S. If you enjoy Exceling (I don’t) and are curious about how I arrived at my owner earnings estimates, please DM me once you've completed some kind of valuation work and we can discuss it together.

Okay - it is cheap, it’s high-quality. What’s the catch?

Why does the opportunity exist?

The first and obvious reason is an overly conservative capital structure. Due to the upfront cash dynamics and subscription-like consistent earnings stream, this type of business could afford significantly more leverage. Instead of borrowing to pay high dividends or do huge buybacks, the management decided to have too much cash on the balance sheet doing nothing or earning meager returns on treasuries.

The second reason for the discount was the growth plans that didn't come to fruition during the past 5 years. The first and most significant failure was a failed joint venture to build and operate ONE°15 Marina Puteri Harbour Malaysia. Puteri Harbour was supposed to be another Sentosa Cove, and SUTL committed around 40M to develop it. SUTL decided to exit the JV and divest its assets.

This was the reasoning:

“The protracted pandemic led to strict international border / travel controls, significant delays in construction, rising construction costs, weak economic sentiments and sluggish demand for long term memberships.”

Furthermore, the group had other ambitious plans in mind back in the 2016–2019 period. They were looking to acquire, build (thus the cash position), and sign contracts. There was even one news article citing plans to add some 20 marinas under its management in the next few years - at the rate of four annually (this was in 2016). The investors got excited, but these plans were too aggressive, and the management didn’t execute them quickly or well enough. COVID-19 didn’t help either, as most of these third parties faced regulatory problems and delays in the construction of their respective marinas and decided to take a step back. Virtually all of their planned or signed management contracts got delayed or terminated.

However, while annual reports are far from clear or thorough enough, if you pay attention, you can notice a slow toning down of the growth plans over the years. The direction has shifted from aggressive growth and ambitions of buying and building to a more asset-light approach with an emphasis on management contracts. Also, Arthur Tay stopped being so vocal about "SUTL’s future prospects and expansion goals" in interviews and conferences. This I like.

The third reason why a company might be cheap is purely because of its illiquidity and tiny capitalization. There has been no analyst following, no investor presentations since 2016, and everything IR-related is out of date.

Institutions likely don’t want to hold the stock since there’s almost no information provided in the annual reports about the business model (except the footnotes). And the company was listed via reverse takeover in 2015, so there was no need for a prospectus. A lot of scuttlebutt and guesswork needs to be involved in analyzing it (so take this analysis lightly). Also - it being majority owned by the Tay family doesn’t help out.

Moreover, the few investors who followed and who were excited about its growth plans were faced with slow execution, a flat stock price over the last 5 years and likely gave up on the thesis and reallocated funds elsewhere.

However, as we all know, past performance ≠ future performance.

Catalysts

Although cheapness on any valuation metric could help, I expect that this massive cash pile will be partially distributed in the next few years (whether through dividends or a growth opportunity). SUTL is not a Japanese net-net, and it seems like management’s need to grow grow grow has finally waned.

Coincidentally enough, this was added for the first time to the Capital Management section of the 2021 annual report:

“The key discipline adopted is to widen the margin between the return on capital employed and the cost of that capital.”

Moreover, management has started thinking of ways to put that cash to work or return more profits to shareholders. They’ve used half of the cash pile to buy treasuries and increased the dividend which was flat at 0.02 cents from 2016 to 2021 to 0.05 cents per share LTM. I’m also glad that they already proved capable of doing somewhat decent capital allocation in 2020, with opportunistically buying back shares in the 0.4-0.5 range.

To top it all off, this is not some kind of dying business at an attractive price but a monopoly in a growing industry with various trends going in its favor:

• the global luxury yacht market is forecast to expand at an annual compounded rate of 9.8% to US$12.7 billion by 2028.

• rise of affluence and ultra-high net worth individuals among Asians

• growth of Asia’s ownership of superyachts

• more operating leverage may take place as they continue to roll out more marketing and promotional activities to drive revenue

• there’s a growing demand for berths and lifestyle waterfronts in Asia. SUTL aims to brand marinas “as places where people can dine, shop or hold parties even if they don’t own a luxury boat”

• completion of marinas under management contracts in the next year or two and signing new ones in Asia-Pacific

• addition of 37 additional berths with the reconfiguration of Sentosa Cove and Nirup Island opening

What are we missing here?

Risks

The combination of valuation, quality and the dividend takes care of most risk.

But maybe the most significant risk/uncertainty revolves around the expiration of ONE°15 Marina Sentosa Cove lease in 2034. (Un)fortunately, Singapore is not Balkan but is rather meritocratic. Meaning, bidding for the new lease will likely be competitive and there’s a non-zero chance that they will be unable to renew that lease for some unforeseen reason.

However, I’d argue this is more of an uncertainty than a risk because if they don't renew the lease, they could sell the assets located there for a price higher than the current market cap.

Also, negative Enterprise Value with a growing 10-16.7% normalized earnings yield from now till 2034 is good enough for me not to care about this slight risk of not renewing. The more probable outcome is that the lease will get more expensive when they renew again in 2034.

The other big risk is that the Tay family cares more about entrenching themselves into the Singaporean elite than they care about the minority shareholders. Meaning, this turns out to be more of a “networking thing” for them than a business and they underdeliver year in and year out. Or even worse - make a stupid decision with the big cash pile that massively destroys equity.

Conclusion:

Based on the introduction, I bet you expected that I'd pay 20–30 earnings for something. Well…you were wrong. But I do have a wonderful asset here at a fair margin of safety.

Thanks for reading!

Disc: long (19% position at 0.54 SGD)

This is NOT investment advice. All content on this website is for informational and educational purposes only and should not be considered to be advice of any nature. Due your own due diligence.