King Wan Corporation

UOBKayhian on 6 June 2013

Valuations

·      Based on the current price of 33.0 S cents per share, the stock is trading at 16.6x FY13 PE.

·      Share price catalysts include special dividend post the listing of its two Thai associates, new JVs, backed by a strong balance sheet.

Investment Highlights

·      We first highlighted the company when it was trading at 17.7 S cents and it has since returned 86.4%. Strong share price performance was driven by the company’s divestment of its entire stake in Environment Pulp and Paper Company Limited (EPPCO) and Ekarat Pattana Company Limited (EPC) for approximately S$50.2m to Kaset Thai Industry Sugar Company Limited (KTIS). KTIS is set to list on the Stock Exchange of Thailand by July this year. The unlocking of these two assets will increase its NTA by 7 S cents to 31.9 S cents and have led to expectations of a special dividend post listing of KTIS.

·      Consistent dividend payout to support share price. King Wan has paid out more than 30% of its profits as dividend for last three financial years. For FY13, the company paid a total of 1.5 S cents, providing a dividend yield of 4.6%. Furthermore, cash flow from operating activities also came in strongly at S$7.9m despite booking lower profits. With cash holdings at S$16.7m as at FY13, and possible cash inflow after the KTIS listing, we expect King Wan to pay out consistent dividends going forward.

·      Venturing into vessel chartering business.King Wan has a 30% interest in Gold Hyacinth Development Pte Ltd (GHD), which owned a Crown 58 ‘Supramax’ Bulk Carrier. This vessel is designed and built to carry commodities and has a deadweight of 58,000 tons and a net tonnage of 19,582 tons. GHD had chartered out the vessel to a third party on a time charter basis. According to management, this JV is likely to reap an IRR of 6%.

Financial Highlights

·      King Wan reported a lower net profit of S$7.1m in FY13 as compared to S$14.0m a year ago largely due to lower gross margin despite stronger revenue. FY12 also included one-off gains from disposal of investment properties and profits from discontinued operations after the two Thai associates were disposed during the year.

·      Revenue grew 16% yoy to S$66.3m due to the higher revenue recognised on M&E engineering contracts during the year but gross profit fell 16% as gross margin contracted 6.6ppt to 17.1%. The company was hit by an increase in labour and material costs and heightened competition that eroded gross margins.

·      As at 29 May 13, the company had an orderbook of S$166.6m to be completed in 2013-16.