LESS than a month ago, hardly anyone paid attention to The Straits Trading Company (STC), a stock traded so thinly that despite being a billion-dollar company involved in the hot mining sector, no analysts covered it.

Now that blood is in the water, so to speak, the sharks are circling. Speculation or otherwise has driven STC’s share price up to $6.75 as at yesterday’s close, even though the latest counter-offer, made on Monday by the Tan Chin Tuan family-linked Tecity Group, was $6.50 a share.

So what exactly are these people buying?

STC has four core segments: tin mining and smelting, hotels, property , and financial investments. Let’s take it one segment at a time.

The tin business is run through the KL-listed Malaysia Smelting Corp (MSC), of which STC owns 73 per cent, according to its 2006 annual report.

MSC produced about a fifth of the world’s tin output in 2005, or more than 58,000 tonnes, from mining and smelting operations in Malaysia and on the Indonesian island of Bangka. Bangka is one of the world’s largest tin mining areas. But in recent years the Indonesian police have clamped down on illegal mining there, disrupting business.

Of MSC’s two subsidiaries there, 75 per cent-owned PT Koba Tin has been dogged by investigations, causing MSC’s output to fall by a quarter in 2006.

The problems continue. Last June, three executive directors were accused of getting ore from small-scale miners operating outside a licensed area. They were fully acquitted. However, the issue surfaced again on Tuesday, when Koba Tin was ordered to stop smelting to facilitate investigations because its suppliers were alleged to have mined in a forest area.

Hotel arm

STC’s hotel arm is run through Rendezvous Hotels & Resorts International, which operates 14 four or five-star hotels and has a further five under construction. The bulk are in Australia and New Zealand, with one each in Singapore, Malaysia and the UAE, and three in China.

The group also owns commercial and residential properties , the latter mainly freehold land, for rental and sale. A handful are in Singapore while the bulk are in Malaysia. The segment also includes Straits Media, a billboard advertising unit.

In its report, STC said it planned to have minimal equity in development, focusing instead on growing fee-based property and hotel management services.

Next, let’s try to estimate how Tecity’s latest offer – which prices the group at $2.1 billion – implicitly values the component businesses.

Assuming MSC’s market price is fair, we can estimate its value. Translated to Sing dollars, its market cap is $254 million. STC’s 73 per cent stake is worth $185 million.

Next, we estimate the value of STC’s financial investments from its balance sheet as at Sept 30, 2007, the most recent publicly available. At the time, marketable securities stood at $90 million and long-term investments at $385.7 million. STC also held $346.5 million in cash or deposits and had $164 million in short and long- term borrowings. We make the large assumption that these values have not changed.

Subtracting these from Tecity’s offer value leaves a residual of about $1.27 billion, attached to the hotel and property business.

It also includes STC’s mining ventures in China, Australia and Africa and other non-core businesses, but we assume these are negligible.

Again from the balance sheet, STC’s investment properties and properties held for sale were worth about $710 million in total.

We assume these include the hotels, as there are no other large items listed under assets, except for plant, property and equipment, which we assume refer to mining assets.

So Tecity’s offer values the hotel and property business at about 1.8 times its core assets. We haven’t included the segment’s liabilities, so we make a rough guess that it’s valued at twice book value.

To be sure, the above analysis is highly back-of-the-envelope in nature and, published as an analyst’s report, might be sufficient to see this writer out of the door. Nonetheless, let’s see what we can observe.

First, two times book might be expensive now, given faltering interest in real estate. However, many of Rendezvous’ hotel assets are in Australia and China, which are possibly more bullish markets.

Long-term investments

Second, MSC is going through a bad patch but could soar if legal matters clear up. World demand for tin – used not only in plating but also in chemical processes – is growing. China, the world’s largest producer, is also a net importer.

Third, assets may be worth more than recorded. Last year, STC booked a once-off gain of more than $220 million because it revalued its Malaysian properties .

Its long-term investments – which are undisclosed – may also be worth much more. The acquirers, which are major shareholders, almost surely have detailed data on these holdings, which the public does not.

So really, who knows what STC is worth?

Source : Business Times – 31 Jan 2008