Recent  developments  suggest  several  imminent  monetization  events  for  k1 Ventures going forward.  The declaration of a surprise interim dividend of 1ct/share in 1HFY13 came on the back of a cash distribution of S$27m from KUH on the sale of EmbanetCompass.  Meanwhile, another portfolio investment MMR is currently the subject  of  a  takeover  bid  by  Freeport-McMoRan  Copper  &  Gold.   Next  on  the  divestment  slate  could  be  China  Grand  Auto,  which  has  filed  for  an  IPO  on  the Shanghai  Stock  Exchange.    We  see  the  recent  run-up  in  the  stock  price  well-supported given management'scommitment to return excess cash to shareholderson portfolio exits.   A portfolio of high-quality investments underpins our optimism on  the  stock.  Our  TP  of  S$0.23,  based  on  a  20%  holding  company  discount,  offers 29% upside from current levels. We maintain our BUY recommendation. 
 
Strong 2QFY13 driven by cash distribution from KUH. 2QFY13 net profit soared 24x to S$29.4m, driven by a S$27.6m cash distribution from Knowledge Universe Holdings (KUH). The rail equipment business under Helm performed better q/q on better cost management and higher railcar utilization rates. Along with the results, k1 declared an interim dividend of 1ct/share.  We  believe  the  latest  round  of  distribution  from  KUH  is  driven  by  the  sale  of EmbanetCompass, an online education platform, by KUH/Technology Crossover Ventures to  Pearson,  owner  of  the  Financial  Times,  for  US$650m.  After  several  rounds  of distributions during the last few years, k1's holding cost for KUH has been reduced from its original  cost  of  US$56.6m  to  US$4.8m  at  the  end  of  the  last  financial  year.  Further distribution  from  FY12  onwards  is  recognized  in  the  profit  &  loss  statement.  More remarkably,  the  past  distributions  from  KUH  resulted  from  sale  of  non-core  investments. The  primary  core  business,  a  global  pre-school  education  franchise  with  3000  locations worldwide  and  enrollment  of  over  300,000  students,  has  grown  steadily  in  overseas markets,  operating  under  well-established  brands such as Busy  Bees in the  UK,  Learning Vision,  Learning  Horizon,  Pat's  School  House,  Brighton  Montessori  Centres  and  the Canadian  International  School  in  Singapore  and the Children's House in Malaysia.    We believe the investment in KUH is the crown jewel of k1 and will reap a bountiful return on an eventual exit.

In  divestment  mode  following  an  unsuccessful  management  buyout.  Following  an unsuccessful  management  buyout  by  major  k1  shareholders  Keppel  Corp,  Steven  Green and  BV  Group  last  year  (offer  price:  S$0.135/share),  management  has  committed  to managing its existing investments for eventual exits and returning the excess cash back to shareholders.  Embarking  on  the  divestment  route,  we  believe,  will  help  unlock  the substantial value embedded within key holdings such as KUH and Helm. While the timing of  any  asset  sale  is  uncertain  and  subject  to  market  conditions,  we  believe  the  company has built up a quality investment portfolio with good prospects of substantial capital upside.  We  noted  that  during  the  tenure  of  current  management,  the  company  has  returned 23cts/share in distributions from investment profits to shareholders.  

More  distributions  down  the  road?  Beyond  the  current  interim  dividend,  we  think investors  could  potentially  get  another  round  of  distribution from  the sale  of  MMR shares, which is currently the subject of a takeover bid by Freeport-McMoRan Copper & Gold.  k1 currently  holds  2.3m  MMR  shares,  and  we  estimate  that  a  sale  at  the  current  price  could generate  net  proceeds  of  S$36m,  or  1.7cts/share.  Given  its  low  cost  for  MMR  shares (~US$5/share),  this  will  represent  another  highly-profitable  investment  for  k1  and  could trigger another  round of  distribution  on completion.  Next  on  the  divestment slate  could  be China  Grand  Auto.  Its  operating  company  Guanghui  Automotive  has  filed  for  an  initial public offering to list on the Shanghai Stock Exchange. If successful, we expect a 3-4 fold return  for  k1's investment of US$12.4m. We value k1's stake in China Grand Auto at US$44m using a 10x historical P/E multiple.

Using  a  sum-of-parts  valuation  methodology,  we  derive  a  valuation  of  $0.28/share  for  k1. Our valuation for Helm is based on an EV/EBITDA multiple of 6x less estimated debt. We value MMR using an exit price of US$16/share and the stake in China Grand Auto at 10x historical  P/E.  We  value  KUH  using  the  sum  of:  1)  an  EV/EBITDA  multiple  of  12x  and normalized EBITDA margin of 12%  for its  core  education  platform  KUE,  and  2)  US$166m for its stake in K12.  k1's 12.2% stake in KUH is conservatively  worth  S$214m,  on  our estimate.  We  noted  that  a  smaller  peer  of  KUH,  Bright  Horizons,  recently  re-listed  in  the U.S and trades at 18x EV/EBITDA. Applying a 20% investment company discount, we have a  TP  of  S$0.23/share.  With  29%  upside  from  current  levels,  we  maintain  our  BUY recommendation.

Source: OSK