King Wan Corp

DMG & Partners Research, May 30

KWAN's (King Wan) Q4 FY13 revenue was 2.7x that of the preceding quarter, but conservative revenue recognition led to lower margins. We expect a positive reversal in later quarters. Interest income of S$1.3 million from associates also contributed to the outperformance.

Strong order book provides high visibility for core dividends. KWAN's S$166.6 million outstanding order book will provide mechanical and electrical work for at least two years. For FY14 and FY15, we also expect contributions from the property developments (Starlight Suites and Dairy Farm Road). Taken together, the 1.5 cent core dividend prospect looks very stable.

KWAN stated that Kaset Thai Industry Sugar (KTIS) IPO is expected to go live in July 2013. This will translate the sale of its Thai Associates into cash (as well as a S$28.7 million income boost) which will allow KWAN to pay a 1.5 cent special dividend in Q2 FY14 forecast. We see this dividend being sustainable over 10 years as the S$50 million value of the Thai Associates is distributed to shareholders as special dividends of S$5 million per year.

Raise TP to S$0.43 based on 7 per cent yield. With the core dividend outlook very stable and the special dividend looking more certain each day, we believe that KWAN should experience further yield compression.

We value the sustainable three cents dividend at a 7 per cent yield (down from 7.5 per cent), translating into a TP of S$0.43. The 9.1 per cent current yield compares favourably with business trusts averaging 6.5 per cent and Reits averaging 5.2 per cent.