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Tea with Solace: King Wan Corp. Ltd.

Monday, November 11, 2013

Business Structure
 
King Wan Corporation Limited is a Singapore-based integrated building services Company with principal activities in the provision of mechanical and electrical (M&E) engineering services for the building and construction industry. It also operates in three other business segments, namely Property, Manufacturing and Services.

It operates principally in four business segments:
 
Engineering segment: Provides multi-disciplined M&E engineering services such as the design and installation of electricity distribution systems, fire protection, alarm systems,
communications and security systems, and air-conditioning and mechanical ventilation systems for the building and construction industry;
 
Property segment: Engages in the development, marketing and sale of residential and commercial properties in Singapore, China and Thailand;
 
Services segment: Provides rental and other services for mobile chemical lavatories and other facilities for construction worksites as well as public and nation-wide public events.
 
Vessel owning and chartering segment: Buys suitable vessels for chartering to third
parties.

(Source: King Wan's website.)
 
From M&E Engineering to developing property, providing mobile toilets and even vessel owning, this seems like a Rojak company to me at first glance. However, bearing in mind that a well mixed Rojak can be delicious, I decided to dig further.
 
King Wan's true strength lies in its engineering segments. It has more than 30 years of experience in the building and construction industry and has established a sound and stable foundation. 
 
Within the mechanical & electrical (M&E) space, King Wan is a company that is involved in the fields of electrical, plumbing, air-conditioning and fire protection. Its economies of scale give it a contract-winning cost advantage.
 
Recently, King Wan Corporation won S$26 m worth of new M&E contracts. Total M&E contracts' value stands at S$168.9 million, lasting to 2016. This will keep them busy.  This core segment contributes an estimated S$5 m to S$7 m, which should be sufficient to meet the 1.5 cents of dividends.
 


 
On the property front, King Wan together with TA Corporation, Hock Lian Seng and Far East Distillers Pte Ltd ventured into condo development. They have recently unveiled “The Skywoods” at Dairy Farm Road. Some people believe that Kingwan is late to the party but I believe it is better late than never. I am paying close attention to how this property segment can contribute to their overall performance.
 
In 2013, the company ventured into vessel ownership and chartering business through Gold Hyacinth. The first vessel purchased called “Hai Jin” is a bulk carrier. The vessel has since been chartered to a 3rd party. This operation should contribute to the group’s results in the new financial year, which I am keeping an eye on to see how it can value add.
 
The rental of mobile toilets contributes about 4% of group's total revenue. It provides a diversified and steady income stream.
 
Perhaps, the biggest reason why the stock jumped this year was the announcement of Share Sale Agreements signed with Kaset Thai Industry Sugar (KTIS). KingWan has agreed to sell to KTIS its entire shareholding in Environment Pulp and Paper Company (EPPCO) and Ekarat Pattana Company Limited (EPC), comprising 5 percent in cash and the rest in listed KTIS shares. Barring unforeseen circumstances, KTIS shares are expected to list on the Stock Exchange of Thailand.
 
This event can unlock shareholder value. In the latest announcement, Kaset Thai Industry Sugar (KTIS) has applied for IPO. The Securities and Exchange Commission (SEC) in Thailand has allowed KTIS to begin marketing its shares. This adds another level of certainty to the anticipated IPO as well as the declaration of the 1.5 c special dividend.
 

 
Financials Fundamental

 
Market Cap ~ $103M @ $0.295 per share
EPS ~ $2.35 cents
P/B ~ 1.21
NAV ~ $0.2431
PER ~ 12.55x
Dividend Yield ~ 5% (Based on core 1.5c dividend)
Dividend Distribution ~ Aug/Nov Semi-Annual Distribution
Current Ratio: 1.46
Quick Ratio: 1.43
Gross Debt to Total Equity Ratio: 18.3%
 
Conclusions
 
I like the strong core M&E business. The strong order book can sustain a few years of core 1.5 cents dividends.  I like to be rewarded with dividends while I monitor the company growth. Semi-Annual distribution has been consistent even during the crisis year which is good.
 
With the impending listings of the group’s two Thai associates, EPPCO and EPC, the financial position should be boosted. I will be looking closely whether King Wan can explore new investments that can add value to share holders.
 
Some risks are also on my mind. The risk in property development has increased with more cooling measure introduced. We have yet to see result from Vessel Ownership and Chartering business; profits may get dragged if it does not perform well. Revenue will decrease with a lack of contribution from its Thai associates after sale.
 
I would usually write down the reasons for investing in a company. If the company takes a turn for the worse, I take out the piece of paper and analyse whether the reasons for buying the stock still makes sense.
 
For King Wan, if the competitive edge of the engineering segments gets eroded by competition and if the listing of Kaset Thai Industry Sugar (KTIS) gets into trouble, it will be enough for me to admit I made a mistake. This will be the right reasons for me to sell the stock.
 
Disclaimer: The article is my personal opinion and is not a recommendation to buy or sell. Any increase in popularity of the stock that leads to an increase in share price will benefit Solace in the long run, Haha.
 
Read other guest blogs by Solace: here.

22 comments:

Solace said...

Hi AK,

Thanks for inserting all the nice pictures haha.

Another risk i forget to raise up is liquidity. Kingwan daily volume can be less than $200K, it is a common problem to many undervalued small caps. However my personal opinion is that with profitability, cash flows, dividends, strong balance sheet, it will somehow check out the risk. Increase in market attention can bring back liquidity in due time.

Been wanting to hear your views, did i blatantly miss out any key risks or key factors in my consideration? :D

AK71 said...

Hi Solace,

A couple of readers asked me about King Wan before but I never did do any research on the company. So, your guest blog is going to be useful for some readers here. :D

I am afraid I don't know enough to say anything about King Wan. I think you did a pretty good job researching this. :)

Banzai said...

Hi
Pardon me to post a question about Saizen Reit here. Recently Saizen reit did a consolidation and i am currantly vested in this counter. Could you post something about this so that I am clear of what is going on. I am a newbie ^^

Cheers,
Banzai

AK71 said...

Hi Banzai,

I think another reader asked about this recently too. :)

Fundamentally, nothing has changed. If you had 5 lots, now you have 1 lot. The value multiplies by 5. It is proportional.

The business runs the same way it was running before and is also worth the same it was before. :)

Banzai said...

Hi AK71,

Thank you for the clarification.
Thankful to all those posts in your blog. Learned a lot from them.
God bless you!
Banzai

AK71 said...

Hi Banzai,

You are welcome. :)

It is, of course, possible that unit price could get a lift if the proposal by Argyle is implemented.

We can only do what is sensible and hope for the best. Things might not go the way we want them to sometimes. ;p

Solace said...

My update on kingwan,

With the current political situation in Thailand, the potential listing of KTIS by deadline March seems to be fading..

However a check will reveal that the listing approval granted by the Office of Securities and Exchange Commission (“SEC”) in Thailand to KTIS is valid for a (6+6)-month period from 16 August 2013. Hence, KTIS has up to six months with the option to extend it for a further six months to list its shares to the public.

Points to consider:

1) Will KTIS list successfully?and if it does not list how will the market reacts?

2) with the recent tightening policies, property cooling measures, expectation of rising interest rates etc . How well will King Wan property segments fare in the future?

investors will have to judge their own risk appetite. Know one objectives and goals. Is the potential capital gains and dividends good enough for you to invest in?

Only each individual can answer for himself.

Solace said...

Kaset Thai International Sugar Corporation (KTIS Group)may seek to list at 2nd quarter of this year 2014.

http://www.bangkokpost.com/business/news/393061/ktis-group-seeks-funds-for-expansion.

If this true, it will be of welcome news to Kingwan.

Recent price weakness could indicate that some investors are getting impatient of the listing.

Reminder to myself. It shows how important it is to buy stock with a safety margins and not trade base on news. Having patience by staying vested in fundamentally good stock is also important as we wait for catalyst to come.

Solace said...

http://www.bangkokpost.com/business/news/403301/ktis-to-build-more-plants-with-ipo-cash

KTIS debut on the Stock Exchange of Thailand has been slated for April 2014.

This is followed by the run up in price of KingWan on Friday.

Interesting development, I am very much in the black, this could well be my best pick in terms of return in 2013.

Still have be careful not to chase after it if one has not vested at lower price. Have a safety margins.

Solace said...

Kingwan is back on track.

"King Wan receives S$45.4 million worth of shares
from the listing of Kaset Thai International Sugar
Corporation"

Highlights
 KTIS to commence trading on the SET on 28 April 2014
 King Wan receives 116.32 million KTIS shares at 10 Thai Baht per share
 King Wan will hold 3.01 per cent of KTIS post-IPO

http://infopub.sgx.com/FileOpen/KingWanPressRelease25Apr2014.ashx?App=Announcement&FileID=293453

AK71 said...

Hi Solace,

A dose of good luck here! Everything is panning out nicely! Good one! :D

betta man said...

King Wan share price recently dropped from 0.34 to 0.295. Could it be due to the political turmoil in Thailand ?

AK71 said...

Hi betta man,

Could be the case although it is difficult to say for sure. There is no accounting for Mr. Market's behaviour. -.-"

Could be a buying opportunity for people who have been waiting. ;)

betta man said...

I think I could have found the reason for the dip:

http://asia.nikkei.com/Business/Business-Briefs/Thai-sugar-maker-Kaset-Thai-dips-below-IPO-price

Solace said...

King Wan Corporation announced it has secured five new mechanical and electrical (M&E) projects in Singapore during the period from May 2014 to July 2014, worth a total of $25.5 million. The five new projects are as follow:

Plumbing, sanitary and gas system installation for a Civic Community Building with sports and recreation developments atop a 2-level basement located at Tampines;
Plumbing and sanitary installation for the Crown Plaza Hotel Extension located at Airport Boulevard;
Plumbing, sanitary and gas system installation for The Venue located at Tai Thong Cresent (a mixed development comprising of 28 commercial units and 266 residential units atop a 3-level basement carpark);
Plumbing and sanitary installation for Sembawang N1C10 (1,200-unit HDB project with multi-storey car park, precinct pavilions and community facilities);
Plumbing and sanitary installation project for the Selarang Camp;

These projects will commence in the second half of 2014 and are scheduled to be completed by 2017. King Wan’s current order book stands at $178 million and will last the group till the year 2017.

Source: http://www.theedgesingapore.com/the-daily-edge/business/49084-king-wan-corp-wins-255-mil-worth-of-new-mae-contracts.html

Solace said...

Core business of M&E still remains strong at least till 2017.

The total dividend per share for FY14 will be $0.020/share. $0.005 higher than previous FY.

betta man said...

hi solace, may i know the source of the info regarding FY14 dividend ? Thks

Solace said...

Hi Betta man,

I refer to the Full year result and press release at end may 2014,

Highlights
 Final dividend per share: 1.5 cents;
 Total dividend per share: 2.0 cents for FY2014; Dividend yield of 6.3%;
 Order book (M&E) to date: S$153 million lasting till 2017

http://infopub.sgx.com/FileOpen/KWCPressReleaseFY31March2014.ashx?App=Announcement&FileID=299341

Can get from SGX directly.

Solace said...

one of the fundamental method I use to evaluate company is to study the management (Integrity, salary, background, their future plans and business approach)

Below is a short interview with kingwan MD Chua Eng Eng, to understand more about management philosophy and approach to making Investments.

http://aseanequities.com/insights/secret-behind-king-wan-successful-investments/

Solace said...

KingWan 1QFY2015 Results Main Highlight:

Highlights
• Gross profit margin improves to 24.9%
• One-off gain from disposal of associate of S$24.1m
• Net asset value per share increases to 31.83 cents
• Order book of S$164m lasting till 2017

http://infopub.sgx.com/FileOpen/KWCPressRelease1Q2015.ashx?App=Announcement&FileID=309211

Knowing when to sell a stock is usually not easy. A common method is to sell when the stock has surpass or reaches its fair valuation.

What is a fair valuation? This itself is subjective and valuation can be reached using various methods. I will give a brief summary of my valuation of kingwan.

1. Sum of the part Valuation

Valuing a company by determining what its divisions would be worth if it was broken down.

Assuming that King Wan is an asset play, adding up how much its worth in Dormitory Venture, Vessel holdings, KTIS holdings and then finally adding up to its NAV. We will have its RNAV value. Divided by the amount of outstanding shares, arrived at a fair value of 0.355 per share.

2. Using valuation metrics

Doing a conservative estimate of FY2015 earning and calculating the average PER of past 5 yrs gives a PE of around 8 X

NAV increased to 31.83 cents. King Wan is trading close to one time book value. Dividend yield is about 6.25%.

Plus taking into other indicators like the FCF, visibility of order books, and likely recognition of a greater bulk of earnings of projects at later stage, i derive a fair value of about $0.41.

So what did I do?
Solace do a partial divestment at $0.345 some time ago and will continue to stay vested until the stock hits $0.41.

Solace is vested at a price of $0.26. Valuation is subjective, hence is it is important to have a safety margins and factor in a certain discount to your valuation before we make any entry.

P.S. Always a chance that solace is wrong and end up looking like a fool..







AK71 said...

Hi Solace,

Congratulations! :D

Thanks also for the thoughtful and well written comment. This should really have been sent to me as a guest blog instead of hiding in the comments section. :)

Don't worry about possibly looking like a fool from time to time. This is something Mr. Market is good at making us do. See one of my recent blog posts on 2 particular counters? LOL. ;p

AK71 said...

From my chat with Solace on FB:

S:
Kingwan dalian project (DSC) is a Lemon, has been dragging it down.
Based on hindsight, it has failed to sell its KTIS holding when it IPO on a high. Although this I cannot put fault, as it is unpredictable.
The investment by kingwan appears more & more like "diworsification" to me.
Core M&E is doing well, but they should realize by venturing out, not all is working well.
I have reduce exposure to this stock recently.
Potential QC penalty on starlight suite over unsold unit, dividend might be impacted
9:50AM

AK:
Thanks for sharing. My investment in KW is small. Will see how things pan out. smile emoticon
Mine if I cut and paste your sharing in my blog's comments section?

S:
Go ahead bro!

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