King Wan

OSK RESEARCH on 4 Feb 2013

WE initiate coverage with a "buy" rating and TP of $0.40. King Wan (KWAN) is Singapore's leading mechanical & electrical (M&E) services provider for the construction industry, and also operates the country's largest fleet of mobile lavatories. KWAN's investment in two Thai associates for $12.3 million were sold last year for $50 million, and we expect this sum to be distributed over the next 10 years, doubling the dividend and raising the yield to 11 per cent.

The Thai associates were sold to Kaset Thai Industry Sugar (KTIS) for 5 per cent in cash and 95 per cent in shares of KTIS, which is headed for IPO within five months.

Being the third-largest sugar miller in Thailand, and the largest listed one, we expect the IPO to perform well, which provides upside to the value of the Thai Associates. KWAN has no moratorium on the sale of its KTIS shares and thus enjoys full flexibility on the timing of the sale. From another angle - if KWAN sells its KTIS shares immediately on IPO, its net cash balance would be 74 per cent of its entire market cap.

KWAN's core business is set for stable growth with its highest order book on record of $176 million. This compares very favourably with the $129 million to $146 million order book range of FY2008-FY2011. With this positive outlook, we expect the base-case scenario of 1.5 cent dividend to be easily maintained.

KWAN's balance sheet is solid with a net cash of $21.5 million. As the core businesses no longer require much capital expenditure, KWAN has been aggressively returning cash to shareholders - dividends grew at a compounded annual growth rate of 82 per cent over the last five years. At the current 1.5 cent dividend, KWAN still has four years of dividends in its net cash balance.

Dividend discount model (DDM)/discounted cash flow (DCF) values of $0.40/$0.44. We value KWAN at $0.40 based on a dividend yield of 7.5 per cent. This valuation ties in very closely with our DDM and DCF values, which are $0.40 and $0.44 respectively, and they incorporate some very conservative assumptions. In this yield-hungry environment, high-yield instruments like REITs have been compressed to a 5.9 per cent average yield. We believe that early movers into this stock can enjoy both capital gains from yield compression and a very attractive sustainable dividend for a total return of 59 per cent.

BUY