StockPick

Updating in Progress...... 26-Mar-06

Note :

1. Original post was created in Jul-05, some of the contents may not have been updated.
2. I'll stop updating this post on a weekly basis and will now do it on a quarterly basis, after the quarterly reporting period, to reflect the latest in REITs.

Background
During the past couple of years or so, interest in REITs had been very high, with good capital gains made by unit holders in all the REITs. After a decline in REITs prices in my last update on 6-Jan (CMT new units issue were even undersubscribed), most hv recovered (except MMP)and even reached new highs. MLT, AREIT, CMT and CCT continues with their acquisitions while new REITs (ART 1-for-5 issue @ $0.68 to Ascott s/h , Keppel 1-for-5 issue to Kepland s/h and AllCo IPO @ $1) will soon make their mkt presence.

But, as local REITs are very much still growing up from its infancy stage, I believe money can still be made by being selective on our investments.

MapleTree, CCT, A-REIT still have room to grow locally, but CMT and even MapleTree will likely move up to the next level and expand overseas soon. Local competition-wise, REITs in shopping malls is currently the most intense, with CMT vs Suntec vs Prime and new REIT (CentrePoint) coming on-line soon. CCT will have to face off KepLand this year in the Office Bldgs arena and we may see others like UOL coming in. A-REIT will also likely face off Cambridge REIT (group of private Industrial Property owners being organised by Finian Tan) soon. I wonder if we'll see some mergers in the longer run.

Other countries like HK and Malaysia are also taking the cue fm S'pore's success and are launching their own REITs. I'm sure this will impact our mkt in the longer term as foreign investors start to switch their funds out of S'pore for more attractive yields and growth prospects of foreign REITs. Lastly, watch the bank interest rate very closely as this will strongly affect the price of REITs. With coupon rate for both 3-mths T-Bills at 2.67%, my personal thoughts on Risk vs Yield have been adjusted up by 0.5% on 6-Jan-06,

• More than 5.75% : Comfort Zone
• 5.25-5.75% : Calculated Risk Area
• 4.75-5.25% : Playing with Fire
• Less than 4.75% : Playing with your Life :D

It's of course not so simple as just yield vs risk. Look at other things like NAV, asset base, potential growth, quality of assets and mgmt, parentage,... and draw your own conclusions :D

At its peak in 2005, REITs accounted for 60% of my profits and forms more than 40% of my portfolio. But, with the danger seen in increasing interest rates, I hv reduced my exposure to REITs. At end-2005, REIT accounted for ~45% of my profit and forms ~17% of my portfolio. I don't expect to be able to replicate the same profit level in 2006 and will be maintaining REITs at aro' 20% of my portfolio, more as a defensive measure.

Yield Data
Data for S'pore listed REITs are as fllws,

REIT	Period	DPU (cents)	Mkt Price	Annualised Yield	NAV	Assets Type
CMT	Q3 : End-Sep '05	2.55	S$2.29	4.454%	$1.52	Shopping Malls
CCT	Q3 : End-Sep '05	1.81	S$1.52	4.763%	$1.58	Office Buildings
MapleTree	Q3 : End-Sep '05	4.47	S$1.00	4.492%	$0.57	Industrial Buildings - Logistics Warehouses
A-REIT	Q2 : End-Sep '05	2.91	S$2.00	5.820%	$1.21	Industrial Buildings - Factories
Suntec	Q4 : End-Sep '05	1.605	S$1.10	5.836%	$1.06	Shopping Malls + Office Bldgs
Fortune	Q3 : End-Sep '05	HK8.247	HK$5.75	5.737%	HK$6.68	HK Shopping Malls
MMP	NA	NA	S$0.95	5.284%	S$1.03	Shopping Malls + Office Bldgs

NOTE : Mkt Price is as on 6-Jan-06

Results Announcements (Not Updated)

• Suntec : 26-Jul after mkt close. DPU 1.561cts for Q3 ($1.18->$1.21)
• Fortune : 27-Jul after mkt close. DPU HK8.25cts for Q2 (HK$6.65->HK$6.50)

Dividends xd (Not Updated)

• 25-Jul : A-REIT ($2.37-> $2.36)
• 28-Jul : CCT ($1.53->$1.55)
• 29-Jul : CMT ($2.64->$2.59)
• 2-Aug : Suntec ($1.19->$1.19)

Other Dates (Not Updated)

• 27-Jul : A-REIT announces acquisition of 9 properties at $271.7Mil ($2.33->$2.31)
• 28-Jul : MapleTree starts trading ($0.68->$0.885)
• 17-Aug : Prime lodged draft prospectus. Price $0.93-$0.98 for min yield 5.12%
• 25-Aug : A-REIT announces acquisition of 3 properties at $70.25Mil ($2.20)
• 25-Aug : A-REIT 1-for-20 Preferential Offer
• 1-Sep : A-REIT announces acquisition at $34.8Mil ($2.26-$2.29)
• 13-Sep : Prime launches IPO @ $0.98 after 5pm
• 15-Sep : A-REIT xo ($2.24 -> $2.23)
• 16-Sep : CMT 1-for-10 + New Shares, xo in 12-Oct
• 19-Sep : Prime starts trading fm 2pm ($0.98 -> $1.05)
• Q4-05 (?) : Link REIT (in HK) launches IPO
• 2006 : KepLand launches Office REIT
• 2006 (?) : CentrePoint REIT launches IPO

Comments

• CMT - Yield is 4.454% @ $2.29. Price recovered during the past weeks after dropping close to $2 previously due to the under-subscription of new units in Nov-05. Although the yield have improved from less than 4% previously, the risk is still high for me, esp since NAV is only $1.52 (greatly improved from $1.30 previously). The only way for them to improve the yield is either for the price to drop further or to expand with yield accretive acquisitions (not that many quality shopping malls left). China ones fm Capitaland may be spun off as a separate REIT. The full impact of the acquisitions of Bugis Junction and Jurong Entertainment complex will be seen in the coming quarter.



• CCT - Yield is 4.763% @ $1.52. Price hv been steady for quite a while now. I guess they may do some acquisitions soon as there are still many quality office bldgs aro'. Can consider to accumulate some if prices drop below $1.45. But, competition will come this year when Kepland launces their own Office REIT.



• MapleTree - Yield is 4.492% @ $1.00. Prices hv firmed up to aro' $1 recently. Hv been on an acquisition trail since IPO both locally and overseas. With NAV at $0.57, the risk to me is still very high. Best for speculative play.
  
  
• A-REIT - Yield is 5.820% @ $2.00. Prices hv been recovering recently after touching a low of $1.7x. At NAV of $1.21, premium to NAV is still high. Can consider to buy some if yield is above 6%.
  
• Suntec - Yield is 5.836% @ $1.10. Prices hv recovered after touching a low of $1 due to the failed deal with CDL. This is largely due to Capital Group accumulating in the open market and crossing the 5% holding level. Acquisition fm Wing Tai hv proceeded and Suntec will also acquire CHIJMES fm LKH, both being funded with debts. With the increasing interest rate, hv to be careful of REITs.



• MMP - Yield is 5.284% @ $0.95. Newly listed on 19-Sep at $0.98, hit intraday high of $1.13 before dropping to current level.
  
  
• Fortune - Yield is 5.737% @ HK$5.75. Price hv weakened since Link IPO was launched in HK. With more choices of REITs in HK, Fortune hv become unattractive.

Disclaimer : The above are my own opinions only. Do not rely on it for your investment decisions

Updates :

1. 20-Nov-05 : Added Q106 Results (Released on 14-Nov-05)
2. 27-Oct-05 : AGM Presentation Slides - The statement "Sale of GASCO expected to close in April –June 06" is critical in my opinion as this sale adds $0.07 to NAV. I expect price weakness and will remain aro' current NAV of $0.32 till Apr-06. May even dip to $0.30 or lower within this time.
3. 24-Sep-05 : Added in 3-mth price chart & SGX announcements

Background
K1 recently announced an agreement with MacQuarie Infrastructure Fund to sell them GASCO. This will raise K1 NTA by $0.07. Mkt reacted initially and share price went up fm aro' $0.295 and hit $0.325 before falling back. I got some at $0.31, although it dropped to a low of $0.295 subsequently. However, after Kim Eng released a positive report on 13-Sep, with a target price of more than $0.39 to $0.44, the share price went up again. It'll likely drop back again as the deal is not yet done and investors will get tired of waiting. So, now, a study to see whether I should accumulate more shares :D

Financial Data
All the data in this case study are extracted fm the K1 Ventures 2004 Annual and Mid-Year reports. Some of the figures in the fllwg table are extracted fm the periodical "Shares Investment",

K1 Ventures	2001	2002	2003	1H04	2004	1H05	2005	Q106
Margin (%)	NA	NA	27.5	14.59	16.08	14.65	12.44	?
ROE (%)	-3.01	-19.97	2.91	-----	4.65	-----	9.50	?
DIV (S$)	-	-	-	-	-	0.0106	-	-
EPS (S$)	-0.009	-0.0491	0.0077	0.005	0.013	0.016	0.030	0.0033
Turnover (S$M)	53.176	35.804	63.041	105.034	230.458	255.324	576.815	153.898
Cash + Bank Bal (S$M)	?	336.974	235.333	?	44.562	105.535	201.046	70.478
Short Term Investment (S$M)	?	19.087	99.001	?	58.382	55.126	63.942	341.053
Current Liabilities - Bank Borrowings (S$M)	?	-	-	?	-	-	-	3.976
Long Term Bank Borrowings (S$M)	?	-	16.563	?	135.705	118.45	122.363	575.387
NAV / Share (S$)	?	0.25	0.26	?	0.29	0.29	0.32	0.34

Issued Shares = 1,877,412,503 @ $0.10 Par ; PE 10.5 @ $0.31

Note : FY05 is end-Jun

Substantial Hldgs

• Temasek Holdings : Deemed 36.69%
  Kephinance Investment : 36.08%
  Keppel Corporation : Deemed 36.08%
• BV Singapore Holdings : 14.14%
  BV Investment Holdings : Deemed 14.14%
  Kamal Bahamdan : Deemed 14.14%
  Alex Vahabzadeh : Deemed 14.14%
• Greenstreet Partners 6.46%
  Steven Jay Green : Deemed 6.46%
• GKW Unified Holdings : 5.93%
  Gary Winnick : Deemed 5.93%
• Free Float : 33.53% (15-Sep-04)
• Others
• Outstanding Options : 20,445,500
• Outstanding Warrants 2002 : 230,000,000
• Proposed Warrants 2005 : 38,000,000
  

Q106 Results (Extracts)

Review of Group Performance

The Group recorded total revenue of $153.9 million in the first quarter of FY2006 (1Q FY2006), representing an increase of 94% over 1Q FY2005. Profit attributable to shareholders for 1Q FY2006 was $6.6 million, an increase of 79% over the prior corresponding period. Earnings per share increased to 0.35 cents from 0.20 cents, marking a 75% increase over 1Q FY2005. Group EBITDA was $39.6 million, representing an increase of 235% over the prior corresponding period.

The improved results for 1Q FY2006 were mainly attributable to contributions from (i) Helm Holding Corporation (Helm), the Group’s transportation leasing operations; (ii) Mid Pac Petroleum, LLC, the Group’s retail gas operations in Hawaii (Mid Pac); and (iii) The Gas Company, LLC (GASCO).

The Group recorded contributions from Helm since the completion of the acquisition of the company on 8 July 2005, and a full quarter’s results from Mid Pac compared to one month in the prior corresponding period as Mid Pac was acquired in September 2004. Correspondingly, raw materials, consumables, staff costs and other operating expenses for the first quarter also increased compared to 1Q FY2005.

Depreciation and amortisation in 1Q FY2006 increased substantially following the acquisition of Helm. Due to the accounting treatment for GASCO as a “Discontinued Operation”, no depreciation charge was taken subsequent to the announcement of the sale in accordance with accounting standards. This resulted in an increase of approximately $0.7 million in profit attributable to shareholders.

The increase in interest expense in 1Q FY2006 was due mainly to the acquisition financing of Helm. The Group’s share of result of associated companies in 1Q FY2006 represented earnings from Helm’s joint ventures and associated company.

Balance Sheet Review

Since 30 June 2005, Group shareholders’ funds increased by $40.7 million to $635 million as at 30 September 2005. Of this increase, $26.1 million or 64% was attributed to the effect of adopting the new accounting standard, FRS 39 – Financial Instruments: Recognition and Measurement, from 1 July 2005 as disclosed in paragraph 8 below.

Shareholders’ funds were also positively impacted by increases in the investment revaluation and translation accounts, profit attributable to shareholders and the issuance of shares arising from the exercise of share options in the first quarter.

Following the acquisition of Helm on 8 July 2005, Group total assets more than doubled from $784.2 million as at 30 June 2005 to $1.68 billion as at 30 September 2005. Total current assets increased by $113.6 million to $368 million due to the inclusion of the total assets of GASCO of $264.4 million arising from the reclassification of GASCO as assets held for sale (GASCO Reclassification). The increase was offset by the reduction in cash and cash equivalents due to the acquisition of Helm.

Non-current assets increased by $785.7 million to $1.32 billion mainly due to the substantial increase in fixed assets, investment in associated companies, available-for-sale investments and intangibles contributed by Helm partially offset by the GASCO Reclassification. Intangibles of $261.1 million as at 30 September 2005 comprised mainly goodwill and other intangible assets arising from the acquisition of Helm.

Current liabilities increased by $224.4 million from $33.9 million as at 30 June 2005 to $258.3 million as at 30 September 2005. The increase resulted principally from classifying $122.8 million of GASCO term loans to current liabilities, due to GASCO being reflected as a “Discontinued Operation”, $33.8 million in restricted cash in escrow and owing to minority shareholders of Helm, $16.9 million in shareholders’ loans used to fund the acquisition of Helm, and $10.4 million increase in tax provisions mainly arising from the acquisition of Helm.

Non-current liabilities increased by $587.5 million in connection with the acquisition of Helm. Non-current liabilities would have been $122.8 million higher had the GASCO term
loans not been reflected as current liabilities in accordance with accounting standards.

Prospects

Following the acquisition of Helm, the Group has grown into a sizeable diversified investment company with total assets of $1.68 billion. The proceeds from the sale of GASCO, which is expected to complete by June 2006, will contribute significantly to the Group. It is anticipated that the Group’s continuing operations in transportation leasing and retail gasoline operations will positively impact the results of the Group.

My Comments

• EPS is 0.33cts but is only 0.07cts fm continuing operations, ie. the sale of GASCO will hv big impact on future EPS
• NTA dropped fm $0.31 to $0.20 (NAV $0.32 to $0.34). Goodwill ($28.5Mil -> $185.45Mil) / Intangibles ($17.34Mil -> $261.13Mil) very high for Helm acquisition?!
  

Kim Eng Report (Extracts)

• Strong earnings – FY05 earnings rose 164.7% to S$56.5mil as revenue increased 150% to S$576.8mil. Stable core-earnings aside, the company also expects its latest acquisition of Helm Holding to contribute in FY06E. Helm Holding is North America’s largest locomotive operating and independent railcar leasing company.



• GASCO – k1 has entered into a sale and purchase agreement for GASCO to Macquarie Infrastructure for a cash consideration of US$238mil. GASCO was purchased for US$118.8mil in August 2003. The transaction is scheduled for completion by 2H06 and is subject to approval from the Hawaii Public Utilities Commission and US Federal Trade Commission. k1 stands to gain a whopping US$119.2mil from the GASCO deal, which would be their largest divestment gain to date. The net impact to NTA is 7ct accretion, raising proforma NTA from 31cts to 38cts. If GASCO is disposed, the remaining businesses include child-care, education, technology, energy, life sciences & transport. All of these units carry divestment potential.



• Unscathed by Hurricane Katrina – One of k1’s investments is McMoran (MMR). After Hurricane Katrina struck, the oil & gas company reported that all facilities should resume production with only minor repairs needed at Main Pass 299. k1’s subsidiary had previously held a 2/3 interest in k-Mc, which in turn owns a stake in Main Pass 299. When Hurricane Ivan struck in 2004, k1 had incurred exceptional charges of S$3.3mil due to damanges at Main Pass 299. However, since K-Mc venture has been sold in late 2004, k1 is not expected to book any further exceptional losses. Therefore, any concerns on exceptional charges are unfounded.



• Maintain Buy – While the initial euphoria from the GASCO sale announcement may have subsided somewhat, the current price level is still trading at the pre-GASCO transaction NAV of $0.32 – this level is also our base support view. At the last traded price of $0.305, technicals point to very minimal downside risk of between 0.5ct - 1ct (3.2%) with medium to long term upside rewards of 8.5cts (27.8%) and 13.5cts (44.2%). The risk-reward equation is attractive. Maintain Buy.
  

FY05 Results (Extracts)

Review of Group Performance

The Group’s revenue at $576.8 million for the year exceeded the prior year by $346.4 million or by 150%. The Group reported earnings before exceptional items of $56.5 million, representing an increase of $35.2 million or 165% over the prior year. The Group’s earnings per share before exceptional items increased from 1.33 cents to 3.05 cents or 129% over the prior year. The higher revenue and earnings were in part attributable to the sale of the Group’s investments in K2, Inc. (“K2”), and SEMCO Energy, Inc. (“SEMCO”), as well as the gain recognised upon the exit from K-Mc Venture, LLC (“KMc”). Additionally, the strong operations of The Gas Company, LLC (“GASCO”), the Group’s gas distribution business in Hawaii, and Mid Pac Petroleum, LLC (“Mid Pac”), the Group’s retail gas operations in Hawaii acquired on 1 September 2004, contributed to the positive results.

The Group’s share of its associate’s results improved by $2.4 million compared to the previous year due to a change in accounting policy relating to the treatment of goodwill and reduction in operating losses of the associated company. During the financial year, KULC ceased to be an associate as a result of the injection of the Group’s investment in KULC in exchange for an equity interest in Knowledge Universe Holdings.

The exceptional items for the year comprised expenses associated with repairs for damages caused by Hurricane Ivan to KMc’s oil production facilities prior to the Group’s exit from K-Mc and income from the reimbursement of developmental costs for utility lines of GASCO.

Balance Sheet Review

Group shareholders’ funds increased from $459 million as at 30 June 2004 to $594.5 million as at 30 June 2005, an increase of 30%. The increase in shareholders’ funds resulted principally from the private placement of shares in the amount of $76 million and the profit attributable to shareholders for the year of $56.5 million. Shareholder funds were also impacted by an increase in the investment revaluation account, which was offset in part by a special dividend paid during the year.Current assets of the Group as at 30 June 2005 were $318.3 million or $175.1 million higher than the previous year-end mainly because of the proceeds from the sale of the Group’s investment in K2 and SEMCO Energy.Non-current assets of the Group of $465.8 million as at 30 June 2005 were $53.5 million lower than the last financial yearend. The decline was primarily attributed to the sale of the Group’s investment in K2., SEMCO and the reduction in the pledged fixed deposits with financial institutions upon the Group’s exit from K-Mc. The decrease was partially offset by the additional injection of the Group’s investment in KULC, a former associated company, in exchange for an equity interest in Knowledge Universe Holdings and the increase in assets acquired from ConocoPhillips. The purchase price allocation of the assets acquired resulted in an increase to fixed assets and the recording of intangibles, representing largely goodwill and customer relationships, in the amount of $18.7 million.The decline in non-current liabilities of the Group as at 30 June 2005 was a result of the reduction of term loans and deferred liabilities upon the disposition of the Group’s former subsidiary, K-Mc, being offset in part by the increase in deferred taxation.

Prospects

On July 8, 2005, The Group completed its acquisition of an 80.1% ownership interest in Helm Holding Corporation (“Helm’). It is anticipated that the acquisition of Helm will positively impact the results of the Group for the next financial year.

Mid Year 05 Results (Extracts)

Review of Group Performance

The Group has performed well in the second quarter and its earnings for the second quarter and half year have exceeded those in the corresponding periods last year.

Second Quarter

The Group’s revenue of $175.8 million for the second quarter was $116 million or 194% higher than the corresponding period last year. The Group reported earnings before exceptional items of $27 million for the quarter, representing an increase of $21.9 million or 424% over the same period last year. The increase in earnings and revenue was underpinned by the strong performance of the operations of The Gas Company (“GASCO”), the Group’s gas distribution business in Hawaii, and Mid Pac Petroleum (“Mid Pac”), the Group’s retail gas operations in Hawaii acquired on 1 September 2004. The improved results in the second quarter were also attributed to the gain from the sale of the Group’s investment in K2 Inc of $19.9 million and the gain recognised upon the exit from K-Mc Venture (“K-Mc”) in the amount of $7.9 million.

Half Year

For the first six months, the Group’s earnings before exceptional items of $32.1 million grew by $23.4 million or 268% over the same period last year. The Group’s earnings per share before exceptional items improved to 1.74 cents from 0.55 cents in the corresponding prior year period. The Group’s revenue for the half year increased from $105 million to $255.3 million, an increase of $150.3 million or 143% over the first six months last year. The higher revenue and earnings were largely contributed by the sale of the Group’s investment in K2 Inc, the operations of GASCO and Mid Pac, and the gain recognised upon the exit from K-Mc.The Group’s share of its associate’s results improved $2.2 million compared to the first half of last year due to a change in accounting policy relating to the treatment of goodwill and reduction in operating losses of the associated company. KULC had ceased to be an associate as a result of the injection of the Group’s investment in KULC in exchange for shares in Knowledge Universe Holdings in October 2004.The exceptional items of $3.3 million for the half year pertained to the expenses associated with repairs for damages caused by Hurricane Ivan to K-Mc’s oil production facilities incurred prior to the Group’s exit from K-Mc.In the opinion of the Directors, no factor has arisen between 31 December 2004 and the date of this report which would materially affect the results of the Group and the Company for the half year just ended.

Comments
As K1 is a venture co., a good way to value the co. would be to look at the NAV. Looking at the past years share price data, it can be seen that the share price in fact track the NAV very closely, usually at most 1-2cts discount to NAV.

After losses in FY01 and FY02, K1 had been profitable for the last 3 years. There had been increasing turnover and improving EPS and ROE during this period. Turnover more than doubled every year from $63Mil to $577Mil, EPS from 0.77cts to 3cts and ROE from 2.91% to 9.5%.

The negative is the decling margins fm 27% to 12%. Another big negative is the large nos. of outstanding warrants and options that may be exercised at a price lower than the current share price. When exercised, it'll dilute existing shareholders' stakes. NAV and EPS will suffer.

Lastly, K1 had paid dividends only once in the past 4 years. I don't expect K1 to be a dividend play due to its nature of biz. I would be most worried if they pay out fat dividends as that means they are no longer working hard to buy new biz to develop. K1 should be viewed as a growth play, with share price going up as the mgmt work hard to enhance their assets.

Conclusions
Be warned, the above had been created to justify my recent buy :D

K1 looks like a well managed co. and had grown rapidly during the last 3 years. If they continue to grow like they did during the past 3 years, it'd be a good long term hold.

The recent announcement of the sale of GASCO is not a for sure done deal. Thus, the share price of K1 had not shot up to the potential NAV level. It may take a few more months for the deal to be finalised.

My Action
To accumulate more K1 shares on price weakness. As my entry price is $0.31, I'd try to buy below this level. Should have a couple of mths to work on, assuming their sale deal is not scuttled.

Share Price

• 1mth : $0.28 to $0.325
• 3mth : $0.26 to $0.325
• 1yr : $0.23 to $0.325

References

• 14-Nov-05 : Q106 Results
• 27-Oct-05 : FY05 AGM Slides
• 22-Sep-05 : Reply to SGX
• 22-Sep-05 : Query by SGX on Increase in Trading Vol & Price
• 13-Sep-05 : Kim Eng Report
• 19-Aug-05 : K1 Ventures to sell Gas Company in Hawaii for US$238M
• 18-Aug-05 : FY05 Results
• 12-July-05 : K1 Completes Acquisition of Helm Hldgs Corp
• 25-Apr-05 : Propose Issue of 38Mil Warrants to Greenstreet Partners
• 3-Feb-05 : Q2-05 Results
• 30-Jun-04 : AR2004
• 30-Jun-03 : AR2003

Disclaimer : Use the above at your own risk! We'll not be responsible for any losses incurred but you can give us credit if you make money :D