King Wan Corporation

OSK Research, June 11

WE showcased King Wan at a road show last week.

Management briefed investors on how it arrived at the decision to dispose of its Thai associates as well as clarified KTIS' IPO timeline. We think that post-special dividend, the market will not allow King Wan to trade at a 9 per cent yield indefinitely.

Instead, we expect yield compression to move the share price closer to a 7 per cent yield, as implied in our target price of 43 cents.

Within the mechanical & electrical (M&E) space, King Wan is the only 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. The group is also currently involved in the construction of the Sports Hub.

The core M&E business currently contributes $5 million-$7 million of cash, which is easily sufficient to meet our core 1.5 cent dividend totalling $5.2 million.

Other sources of cash are King Wan's property development arms, its vessel chartering associate, and of course, the sale of shares in the Thai sugar mill (KTIS).

Earlier, we were mistaken in stating that KTIS' IPO was delayed from April. Management clarified that the IPO process began only in June 2012, and the short one-year period to IPO (implicit in the option to reverse the sale) was agreed upon by both parties to hasten the exercise.

Management is "80 per cent confident" that the IPO will proceed in mid-July as planned.

Although profitable and paying good dividends, it sold its Thai associates because: its tax incentives were expiring, the Thai government had granted other licences to its rivals, which would hurt its long-term profitability, and there was little reason to hold on to the illiquid 20 per cent minority interest in a listed entity.

Management intends to eventually liquidate its entire shareholding in KTIS, but we think it may let go of a third of its shares in the short term.

Management also discussed the potential for a dividend policy that could support KTIS' valuations. Maintain "buy".

BUY