I know we are a few days away from ending this fabulous year and everyone is already busy reflecting how they have spent this year and setting goals for the upcoming 2015. I am working on that as well so this most likely be my final action for 2014.
I initiated a new position by purchasing 5 lots of King Wan at a price of $0.295. This is a counter which I have been monitoring for months and I decided to take a small long position given the availability of a good company at a fairly fair price based on my analysis below. The post will be rather long so more on it will be explained below.
The big news over the past 12 months have been the listing of KTIS shares in Thailand SET which made King Wan $45.4 million richer through the share holdings it has with the company. Since the news was announced, shares of King Wan has shot up from $0.26 to $0.34 in April and even went as high as $0.36 once in July. The shares has since retreated downwards by around 20% to about $0.30 and I think it’s fair to give this counter a chance for a review.
Business Overview
King Wan Corporation Limited has been one of the more famous Singaporean based company listed which needs no further introduction to investors. The company is operating within the 4 main business segments – M&E, Property Development, Rental Services and Vessel Chartering. If you need further information on the business segments it operates, you may refer to their website here.
The Financial Numbers
If we take a look at the past 5 years performance, we can see that profitability has not been consistent and rather lumpy throughout the years. This is not surprising given the nature of the project business they are operating under especially for the M&E and Property development segments. Moreover, King Wan’s management has been well known for their track record in investing and divesting its shares in the associates if they feel it would increase shareholder’s value for King Wan.
For example, in 2011, EPS rose to one of the highest due to stable increasing contracts from the M&E business and higher contributions from its associates, which includes a one-off disposal of Cables International Pte Ltd which increased the Group profits by $4.3 million. For the 1H2015, EPS increased to 7.63 cent due to the recognition of a one-time net gain from the completion of divestment of the two Thai associates. Because of this, this has made profitability year on year rather inconsistent.
Interestingly, King Wan has been rather conservative in giving out dividends during 2010 to 2012 when their EPS reached a high of 4+ cents during the years. Because of the unlocking of the assets and earnings retained during those period, the price to book value of the company has increased consistently year on year. We will touch again on this when we look at the balance sheet at a later stage. Over the last 2 years however, the company looks to struggle keeping their EPS at above 2 cents due to the lack of the one-off divestment. This is further exacerbated by the slowdown in the Property Development segment which see little gain contribution to the bottomline. The company’s core business in M&E remained the core pillar after having secured contracts for both residential and commercial development. With price increasing faster than the increase in EPS, the company had struggled to pay out dividends and last year the payout ratio had to go beyond the required availability.
Next, we take a look at the extended Dupont Return on Equity where it is broken down into 3 levers (Profitability, Operating Efficiency and Financial Leverage). This metric packaged the different financial ratios into one and is one of the most important metrics I always use in my analysis.
Profitability – This is taken by taking the net profit over sales. As mentioned above, the profitability is rather inconsistent year on year given the one-off divestment in the specific years such as 2011 and 2015.
Operating Efficiency – This is taken by dividing sales over assets and measures the efficiency of an asset in generating its revenue. You can see that the company is rather poor in this efficiency metric because their customer is project based, which means that revenue recognition will only be made based on percentage of completion method. The recent receipt of KTIS shares as balance payment also increases the total assets figure.
Financial Leverage – As the amount of total assets and equity increase, the company has been taking on further borrowings as you can see from the increased equity multiplier ratio over the years. Some of these money are used for investment in associates while some were being used to pay off the dividends to shareholders. Something definitely to worth taking note of.
The ROE has been dropping over the last 2 years visibly because of the lack of one-off divestment of its business. As investors, the concern would be whether the core business is able to sustain the profitability of the company without further leveraging and divestment of its business. Let’s take a look at how these business segments contribute to the earnings.
M&E
The M&E segment is the company’s bread and butter of its core business. Within the segment itself, the company is involved in the field of design and installation of electrical, plumbing, air-conditioning, fire protection and alarm system for both residential and commercial developments.
The company has won a couple of new M&E contracts this year, including installation for workers dormitory, with order books now at $184.6 million and contracts lasting until 2017. These provide clear earnings visibility for the M&E segments of the business until at least 2017.
If we take a closer look at how much this segment is actually contributing to the earnings over the past few years, we see that they have ranged at about 12-20 cents/share. With new contracts lined up until 2017, we know that this segment will contribute at least $7M to the bottomline over the next few years which translates into about 2 cents/share. At current market price of $0.30, this translate into a PER of 15x just for the M&E segment. This should be the bare minimum investors are ready to pay.
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| M&E Segment |
Investment Holding
This portion of the segment is divided into 3 types of businesses: Property Development, Vessel Chartering and Operation of Worker’s Dormitory.
1.) Property Development
In Singapore, the Group’s investment in property developments are spearheaded by Meadows Bright Development Pte Ltd via 40% stake in the associate company. One of the projects currently at construction is The Skywoods which will be completed by 2016. To date, the company has sold 179 out of the 420 units and it is evident that the property market condition we are currently in is not at all bullish. The breakeven price for the development is at around S$1,100/psf and current market price is selling very near to the breakeven price. We will see if the soft market will result in a loss for this segment.
The Skywoods is a residential development which is located at the lush greenery of Dairy Farm Estate.
Developer: Bukit Timah Green Development Pte Ltd
Address: Dairy Farm Road
District: 23
TOP: 2016
Tenure: 99 Years
Total units: 420
Mixed Units
Units sold (Dec 14 YTD): 177 (42.6%)
Units unsold (Dec 14 YTD): 243 (57.4%)
Source: URA
Highest Price: $1,344/psf
Lowest Price: $1,152/psf
Median Price: $1,302/psf
In China, the company owns a 36.6% stake in Dalian Shicheng which is currently developing both residential and commercial use while in Thailand, the company has also 35% stake through its associates.
2.) Vessel Chartering
The company has bought its first vessel bulk carrier named “Hai Jin” in 2013 which is designed to carry dry bulk commodities. The investment was made through an investment associate, which the company has a 30% stake in.
It may feel somewhat weird to have the company venturing into a totally different business but Managing Director Ms. Chua Eng Eng has mentioned in her interview that it was an opportune time during a selldown that the vessels were selling at a good price for such market specifications and equipment. The seller has actually some cashflow issues which require them to sell the vessels at a discount from US$25M to US$21M. The vessels have since been chartered to a 3rd party. Source Here
There isn’t any indication how much this actually contributes to the bottomline but I would think it’s not significant.
3.) Worker’s Dormitory
This year, the company has entered into the growth sector of worker’s dormitory operations via a 19% stake in the consortium which will be involved in the design, development and operations of one of the largest worker’s dormitory projects in Singapore. This is a good growth sector as we see increasing worker’s demand over accommodation needs and future projects might be awarded similarly to the company. As owner operator, KW is expected to draw revenue from this segment over the next 20 years. This will help to diversify the company’s earnings who is primarily dependent on their M&E business.
KTIS
As a result of divesting its 20% shares in both Environment Pulp and Paper Company Limited (EPPCO) and Ekarat Pattana Company Limited (EPC) on 25 April 2012, King Wan received THB 1,224 billion (approximately S$50.2m), of which 5% in cash and the rest in listed Kaset Thai International Sugar Corporation Public Company Limited (KTIS) shares.
Based on the SPA agreement signed in 2012, the Group holds approximately 3.01% (116,318,000) of KTIS issued common shares after the IPO, which is worth approximately S$45.4m when it was listed on the Stock Exchange of Thailand (SET) on 28 April 2014. The net profits accruing from the completion of the SPA is approximately S$24 million.
Since then, the company has been selling down its holdings in KTIS, albeit only minor. For example, in the latest Q2 results, the company has sold $126,750 worth of KTIS shares. Taking an exchange rate of SGD1 : THB 25, this translates into 44,800 shares ($126,750 / 25 / 11.3) less.
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| KTIS Financial Snapshot FY2014 |
Taking the recent LTM annualized EPS of THB 0.47 and an announced payout ratio of 69.5%, this translates into a dividend of THB 0.30 / share. Since KW owns about 3% of the stake in KTIS, this translates into a dividend of about THB 0.09 cents/share or SGD 0.0036/share. Certainly not a bad deal overall, but not a deal breaker.
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| KTIS Financial Results FY2012 – FY2014 |
Conclusion
Based on the above analysis, I am expecting at least $0.02 + $0.0036 = $0.0236 cents/share for EPS over the next few years assuming no contributions from its investment holding which comprises of Property, Vessels and Worker’s Dormitory. This is rather conservative knowing that there would be some form of earnings contributions especially if the property sectors managed to bounce back and the operations for the dormitory commences in 2017. To make it even a step conservative, I have discounted the estimated EPS by another 10% to allow room for any error. The final estimated EPS came up to about $0.0212.
At current market price of $0.295/share, this translates into a PER of 13.7x which is slightly higher with their long term average of 8.4x. Heck, the book value is increasing and at $0.34, we know how we can only view them from an eagle angle. Do note also that the KTIS is held as an investment holding so they are being marked to market value and this may affect the earnings and NAV. Other risks may also avail in the form of lower projects, higher tightening labor costs and competition and loans it made to its associates. These are things that needs to be considered.
I initiated a very small position in the counter, so it will be interesting to see its progress over the next few months where it develops. At least for this financial year, I would be expecting a final dividend of 2 cents (in addition to the 0.7 interim announced), giving a yield of almost 9%. Maybe not so bad after all.
I will update my Recent Transactions and My Portfolio shortly.
Hi B,
Detailed analysis here. I have never really been positive on companies that venture into new business segments that are unrelated to their core. Conglomerates wanna-be? 🙂
Will be interesting to see how the future pans out for this company.
Hi SRSI
Actually they've done it really well by diversifying their earnings into other category since the core business is meant to be cyclical in nature. They have paid off thus far and it doesn't take too much resources so far for them to do this, since it only accounts for a minor 3.6% of its total earnings.
very good read, keep it up.
this company seems pretty cyclical, however the potential 9% yield looks interesting
Hi Felix
Thanks for your kind words.
The 9% yield is probably only for this year as they have made a substantial earnings from the sale of their associates. Again, another one time divestment which boosted the EPS. If they can sustain their core M&E business to grow, I would not mind a lower but sustainable yield for them.
the mark of a good capital allocator rests in some of their past 'tests' from what i recall they did well in much of them.
Hi Kyith
The management has indeed been a good allocator and recycling of capital whenever necessary. They are not shy to be conservative when required and reward shareholders when the time is due. I think that's a good sign of management appreciation and value towards shareholder.
Hi B,
Dropping by the first time round to say hi 🙂
Most glad a fellow investor has seen some value in King Wan. I have vested in King wan more than a year ago and still holding on to about 50% of my initial investment.
I have share my views with AK before.
http://singaporeanstocksinvestor.blogspot.sg/2013/11/tea-with-solace-king-wan-corp-ltd.html
Most of my thoughts and follow up action are be found in the comments sections. I have done a valuation using Sum of the Part and earning valuation, have come to a fair value of $0.355 and $0.41 respectively.
It is a great idea that you took a small nibble at 0.295 and enjoy the yield while waiting for a bigger safety margin.
Hi Solace
I've just finished reading the article which you have posted on your views.
They are very well documented though I have a question regarding the SOTP valuation on these sort of companies. I am assuming here that you are valuing them using the asset based method. While the other asset plays like the shares in their associates or property development can be valued via their assets, I feel the M&E service would be better valued using the income approach method. Again, they are volatile in nature so maybe an income approach is not the best method to value them. Maybe an EPV method would work on them.
Thanks for your input and I do think that at current price it doesnt provide a compelling buy though it may be good to take the dividend for this year at least and play it out.
Wow! Very detailed and long analysis, indeed! I am vested on this counter for long term too 😉
Hi Richard
I saw your CNAV analysis previously on this counter.
Good to know you are one of the stakeholders of KW too.
Those Singapore companies are really interesting. I'm starting to look overseas so it'll be fun reading up on Singapore. Thanks for the great analysis!
Hi Henry
These companies have definitely smaller market capitalization than the US big players, but they do offer good corporate governance, pretty high yield (good spread between risk free rate and this), dividend & capital gain tax exemption for shareholders. May be worth a while considering 🙂
Thanks for the highly detailed post. Interesting to see yourself and Richard investing in the same stock despite using mainly different methods of analysis. Keep up the great work 🙂
Hi Secretinvestors
Richard used the cnav while I used the earnings valuation method. There are some other bloggers who have used the SOTP method to value KW, so I hope my analysis will prove to be correct for me.
very detailed analysis, keep it up.
Hi usurper
Thank you much for the kind words and support 🙂
How did you calculate the figures for net profit margin? They're wrong for some years.
You wrote that it's "net profit over sales"
For eg. for FY2012 you wrote it's 22.5%
Profit was $14,009,129
Revenue was $57,211,850
So it should be 24.5% instead
Same for some of the other years.
There's no dramatic difference, but just wondering why its inaccurate.
Hi Anonymous
My net profit was including the "Other Comprehensive Income" where you take into account usually the forex gain or loss and also usually leaves out the minority interest portion. Your $14,009,129 I believe was a line above that.
"Since KW owns about 3% of the stake in KTIS, this translates into a dividend of about THB 0.9 cents/share or SGD 0.0036/share."
Another error: I think it should be THB 0.09 cents/share.
KTIS dividend is 0.3THB/share. KW owns 116,318,000 shares of KTIS from the IPO (not taking into account the recent divestment which should be negligible)
That works out to a dividend of 34,895,400 THB, which is approximately 0.09THB/share of KW, not THB0.9.
And yes, it is 0.0036SGD/share
Hi Keith
Thanks for pointing out the mistake.
I have edited it the same on the content.
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