We  showcased  King  Wan  (KWAN)  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  KWAN  trade at a 9% yield indefinitely. Instead, we expect yield compression to move the share price closer to a 7% yield, as implied in our SGD0.43 TP. 

- Market  leader  enjoys  economies  of  scale.  Within  the  mechanical  & electrical (M&E) space, KWAN 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.

- Cash  flow  supports  our  special-dividend  thesis.  The  core  M&E business  currently  contributes  SGD5m-SGD7m  of  cash,  which  is  easily sufficient  to  meet  our  core  1.5  cent  dividend  totaling  SGD5.2m.  Other sources  of  cash  are KWAN's property  development  arms,  its  vessel-chartering associate, and of course, the sale of shares in the Thai sugar mill (KTIS).  

- No delay in KTIS listing; "80% confident". 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% confident" that the IPO will proceed in mid-July as planned.

- Good reasons to sell Thai associates. Although profitable and paying good  dividends,  it  sold  its  Thai  associates  because:  i)  its  tax  incentives were expiring,  ii) the Thai Government had granted other licences to its rivals, which would hurt  its long-term profitability, and iii) there was little reason  to  hold  on  to  the  illiquid  20%  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.

Source: OSK