Saizen REIT: A special dividend?

Argyle Street Management, which holds 8.9% of the REIT, said the REIT had 4.86 billion yen (S$61 m) of cash. That figure amounts to 23.5% of the REIT’s market capitalisation as at 29 October 2013. Argyle wants the REIT’s manager, Japan Residential Assets Manager (JRAM), to consider distributing a significant portion of its cash balance to shareholders through a special dividend.
(Source: The Business Times)

Regular readers know that I like Saizen REIT. I got interested in it during the GFC when it was unloved and I have been blogging about it ever since the early days of ASSI. Some might even say that I know the REIT like a friend. Although friends don't give us money regularly, this one does and if Argyle gets its way, I could be getting a bit more.

What do I think of the proposed special dividend?

Well, if it happens, it is a return of capital. Why do I say this? This is not from higher income or earnings. This is to have excess capital returned to unit holders if the REIT's management is unable to find better use for the money.

Actually, for anyone who has been following developments at the REIT, the management had used the money to buy back units from the open market and made a few DPU accretive purchases as well. I like their cautious approach as they don't seem to be buying buildings indiscriminately. Going on a shopping spree would, of course, fatten their pay checks. It is to their credit that they did not do so.

If a capital reduction exercise should happen, Saizen REIT would have less money on hand for any potential DPU accretive purchases. This means that the management would have to use a blend of equity and debt to fund such purchases in future. So, it would be back to square one for unit holders.

However, I should not complain if I am going to be paid money, should I? Better in my bank account than others' or so some would say.

One reason why I am invested in the REIT is because it is grossly undervalued. Depending on the exchange rate we use for the JPY to S$, the REIT was trading at a 20% to 25% discount for much of  2013.

The warrants exercised in the middle of 2012 strengthened the balance sheet of the REIT considerably. The REIT, already undervalued then by some 40%, was made more so because of that.

So, for those who exercised their Saizen REIT warrants back then, they would be taking back some of their own money if a return of capital should happen.

For those who bought into the REIT at a relatively large discount to valuation and who had no warrants to exercise before they expired, they should be grinning broadly as they would be taking some of other people's money with a margin of safety to boot.

Having said this, special dividend or not, Saizen REIT has been a good investment for me and it is likely to get better in the years ahead if Mr. Abe's policies gain traction.

Related posts:
1. Fukushima and investing in Japanese real estate.
2. Saizen REIT: Risk free rate and unit price.
3. 9M 2013 income from S-REITs and more.

Tea with Solace: King Wan Corp. Ltd.

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 3^rd 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.