StockPick

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",

• 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

# posted by Anonymous @ 9/17/2005 04:28:00 PM