Company Updates

King Wan Review

We have briefly covered King Wan (KW) previously with a 3Q update. At that time, KTIS has yet to be listed on the Thai Exchange. Fast forward to the present, with the completion of KTIS’s listing and the release of KW FY14 Annual Report, we take this opportunity to revisit our investment in the company. As our thesis was based mainly on asset value, the bulk of our analysis will be as such.

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KTIS Holdings

Upon listing, KW received approximately SGD47.6m worth of shares in KTIS at a listing price of 10 THB each. Taking into account the recent fall in price (9.55THB), KW’s holdings are now worth SGD45.5m, of which SGD21.6m has been recognised in books. Therefore, we have revaluation gains of SGD23.9m.

Vessel Holdings

KW also owns a ‘Supramax’ Bulk carrier held through its 30% owned associate. Gold Hyacinth Development Pte Ltd.  This was originally purchased for USD21m, or approximately SGD26.25m based on an exchange rate of 1.25, during a period when the Baltic Dry Index was floundering near a post-crisis low level of 698. Based on DMG’s report in April, the vessel then commanded a market value of USD28m or SGD35m. Correspondingly, KW’s stake will be worth SGD10.5m, a gain of SGD2.6m. However, do note that the Baltic Dry Index in April was almost twice of its current level.

Dormitory Venture

KW recently ventured into the worker dormitory business via a 19% stake in a consortium. The land (in Tuas) has a lease term of 20 years and is to be developed to a facility with 9200 beds. It is anyone’s guess how much profits this will bring, but based on my research, the average rate for 1 bed will conservatively be around SGD250/month. Assuming an occupation rate of 80%, I expect the facility to generate about SGD4.2m in annual revenue for KW. If we use Centurion’s Holdings 3-year low net profit margin of 15% as a reference, we get estimated profits of SGD0.6m. Assuming a dummy discount rate of 10% (I have no confidence in my WACC calculation), terminal growth of 0%, we value the dormitory holdings at SGD5.5m

Pseudo-Sum-of-Parts Value

Adding all gains, totalling to SGD32m, to the current reported NAV of SGD86.4m, we arrive at a RNAV value of SGD118.4m. Based on the current number of outstanding shares, we therefore have a fair value of about SGD0.34, which is fairly close to its current share price.

Challenging M&E Industry

Due to public displeasure about the amount of foreign workers, the Singapore government has been steadily tweaking its policies to reduce the amount of foreign workers employed by companies. As a mechanical engineering company, KW relies heavily on foreigners for its labour. You can see that we are starting to observe the effects of the policies through the increased labour costs, with gross profit margins falling consistently from 23.8% in 2012 to 14.8% in 2014. While revenue has been increasing steadily, this hasn’t added much to the bottom line. If we discount KTIS’ contribution of SGD7.2m in 2012, net profit has from its core operations have actually been decreasing. In the past, the price afforded a margin of safety sufficient to offset this, but given KW’s share price increase, this is no longer something we can be certain of.  To put things simply, even if KW were to maintain its very impressive top line growth, profits would still be decreasing. To top it off (pun intended), with the slowdown in property markets, I think it would be a challenge for KW to continue its top revenue growth.

Property Developments

Things are not all bad for KW however; our fair value of SGD0.34 has been based on the assumption that we value its operations and its property developments at book value. Through its associates, KW has stakes in a number of properties in Singapore, Taiwan and China which are accounted at book value of SGD2.1m. The properties and their estimated values are as below:

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The estimates are based on average transacted prices from Squarefoot Research multiplied by the net leasable area from the official condo websites, note that these values do not include the cost of development and percentage sold. Unfortunately, we do not have enough information to value the remaining properties in China and Thailand, but I think at book value of SGD2.1m, we are fairly safe from much downside, in light of the fact property sales in Singapore and China have slowed down considerably.

Conclusion

Upon KTIS’s listing and its current share price of SGD0.345, we think that our original thesis (value of KTIS) for KW has already run its due course given our targeted fair value of SGD0.34. Moving forward, we have identified downside risks to its operations, negated by upside potential from its property developments. Potential for future revaluation gains are definitely present, but since we are unable to place an estimate, we refrain from including them in our calculation of fair value to be on the safe side. One thing is clear that the margin of safety is much lower now, with future returns to be more uncertain than before given the volatile nature of KTIS shares and KW’s vessel holdings. Furthermore, given how KW is currently trading at P/E 17.9x, normalised EV/EBITDA 13.1x and normalised FCF yield of 3.23%, we have decided to exit our position in King Wan Corporation. We leave it to each individual to weigh the risks and potential gains based on your risk appetite..

Disclosure: The authors have no vested interest in 554.SI

Company Updates

UMS Holdings

Recently, UMS Holdings has declared a bonus issue of 1 share for every 4 held. Given the company’s progress and how the economy has been improving, I would be holding onto UMS and receiving the bonus shares. Hopefully, the company will be able to continue distributing dividends of 5c per share, which translates to SGD 21.5 million. This is possible given its net cash generated from operating activities over the past few years. However, we have to take note that in recent years, the CAPEX has been pretty low, given how much the company has spent on CAPEX previously. Hence, with CAPEX increasing, it may be slightly harder for the company to maintain a 5c per share dividend. However, I would continue observing the earnings of the company, especially with Applied Materials having stronger growth in sales, UMS Holdings would benefit from this as well. With the share price running up to SGD 0.80 from the initial purchase at SGD 0.50, I would start analysing the fair value for UMS Holdings.

New Toyo

Recently, the ex-CEO Gary Yen would be stepping down. With Father and Son no longer managing the company, they have elected David Lim an expert at M&A to be the next CEO. Furthermore, there has been speculations that the family’s 52% stake in the company is up for sale. Given the expertise of the new CEO, perhaps there may be some truth in the speculations? Furthermore, looking at New Toyo of late, the trade volumes have been increasing and today closed at SGD 0.32.

Disclosure: The author is long UMS Holdings, New Toyo

Company Updates

King Wan Corporation

Spoke to my Thai friend recently about the political and economic scene in Thailand. He was explaining to me how the opposition party behaves, the riotings, the bombings etc. When asked of his opinion of when we would expect to see things settling down, he said at minimum he is looking at the end of this year. In view of this, I feel that the listing of KTIS is pretty unlikely this August. That said, in the event that that really happens and the price drops back to approximately $0.20, I would be deploying most of the cash to buy King Wan Corporation.

LionAsia Pac:

When my friend and I first discovered this company, I would consider it a value buy. It was definitely an undervalued company without any doubt. Cash deducting for all liabilities was approximately the same as the market cap back then and going forward, this figure started to increase whereas the market cap decreased due to the share price dropping. Essentially that meant that buying the company at market price, we are practically getting the core business and side businesses all for free! The catalyst we identified was their stake in Mindax, a mining company in Australia. On hindsight, we should have considered the aspect that whilst the company may have such huge amounts of cash, it is due to the inefficiency of the management. Holding onto that much cash just shows that the management does not know where to deploy it and is overly conservative. The point of being very conservative was also a point highlighted to me by my father having managed their accounts before in the past. That said, I would be monitoring the development of the land they recently bought in Yangzhou, China. At any sign of weakness of the China property market or a contraction, I would consider selling the stake the fund holds in LionAsia Pac. This is to increase the amount of cash available to purchase more shares in King Wan Corporation if price does drop. A snapshot of their most recent balance sheet. Back in 2012, when I saw the amount of cash, I couldn’t believe my eyes.

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UMS Holdings:

Net profit jumping 70% and the company proposing a normal dividend of 2c and a special dividend of 1.5c. Given the company having no debts, I expected the special dividend to be 1c. Going forward, given how Applied Materials have bought over Tokyo Electron, gaining a global market share of 25% and strengthening their position as the global leader for semiconductors, I believe would be one strong year for UMS. Furthermore, with the economy recovering, this would definitely flow back to the semiconductor industry, evident when looking at the PHLX Semiconductor Index.

ImageMy apologies for the lack of posts. The past week has been one hell of a week at Uni with assignments due and me running for elections within my society.

Disclosure: The author is long KingWan Corp, LionAsia Pac, UMS Holdings

King Wan Corporation (3Q Update)

With the recent release in King Wan’s 3Q results, I thought I pen some thoughts down. With regards to King Wan, it is a strong company for the following few reasons:

  • Strong balance sheet, with minimal short term debt of approximately 50% of their current cash & cash equivalents and no long term debts
  • Strong core business with an healthy order book of $166mil with completion dates lasting until 2017
  • Strong management shown by how they are able to take advantages of opportunities that comes they way. (e.g. purchase of the vessel chartering business, which has actually offset some of the negative contributions from the Group’s property development segment)
  • While many might disagree, I like it when a company is still controlled by family members

However, what resulted in the initial spike in prices in 2013 would be due to the sale of the Thai Associates to KTIS. With the recent situation in Thailand, it has resulted in KingWan’s price to be slight depressed within the range of $0.27 to $0.285. Nearing the contracted deadline in August, I believe that if the listing of KTIS does not go through, KingWan’s price might take quite a hit. I have emailed their IR of what the company plans to do if such an event occurs, the reply is as shown below.

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Nothing really new to gleam from this email, more of just an update of what we already know.

Overall, KingWan is definitely a good company to have on our portfolios with a good dividend yield. Furthermore, with the strong relations they have with KTIS, I believe that even if the sale does fall through, a new one might be drafted. The only question I guess would be how long does it take, translating to the opportunity costs incurred from waiting. Being a value investor I would continue holding onto the company afterall the value of the company is indeed there. However, it might just be my own thinking and might be biased having invested in the company when it was just trading at $0.19. Would love to hear the views of fellow investors out there.

ComfortDelGro Corporation

Recently, with the share run up to the highs of approximately $2, I have decided it was time to fully divest from ComfortDelGro. The divestment was around early February at $2.01. Here’s the reason for divestment:

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Looking at the P&L, we can see that the company has been able to grow its revenue steadily for the past 5 years. However, we should note that the operating expenses have been growing steadily as well. Following the news on ComfortDelGro, we would notice that the increase in staff cost is most significant. Recently, this has increased by 11.3%, or $123.4 million. Furthermore, looking at the net profit margins, we can see that over the past 5 years, it has been declining. Going forward, with the challenges faced net profit margins may take another dip or stay relatively constant.

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With the financial ratios, we can see that management has been able to constantly increase the EPS every year, increasing shareholder’s returns yearly. However, there has not been growth in the net earnings year on year. Furthermore, looking at both ROA and ROE figures, it has declined slightly despite the increase in EPS, showing that the growth in EPS is slower than that of growth in assets and equity.

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Valuations wise, we see that the FCF/EV or FCF/Market Cap is roughly 4%. This yield compared to the US Treasury 30Y and US Corporate Bond Index yield of 3.70% and 3.07% respectively, shows that ComfortDelGro is nearing its fair value. Doing backwards calculation, with the range of yields, it places the fair value within $2.21 to $2.73. ComfortDelGro compared to its peers in Singapore namely SMRT is definitely a much stronger player, with its approximately 50% market share of the taxis and exposure to transport systems overseas. However, given foreseeable challenges in the near future and the company trading near fair value, I have decided that it was time to divest from ComfortDelGro.