King Wan raises yield to 11%

Thai associates? value may increase on KTIS IPO. Effectively 74% of market cap is net cash. The Thai associates were sold to Kaset Thai Industry Sugar (KTIS) for 5% in cash and 95% in shares of KTIS (equivalent to an estimated 3% of KTIS), which is headed for IPO within five months.

Being the third-largest sugar miller in Thailand, and the largest listed one, we expect the IPO to perform well, which provides upside to the value of the Thai Associates. KWAN has no moratorium on the sale of its KTIS shares and thus enjoys full flexibility on the timing of the sale.

From another angle ? if KWAN sells its KTIS shares immediately on IPO, its net cash balance would be 74% of its entire market cap.

Core M& E business is stable and growing. KWAN?s core business is set for stable growth with its highest order book on record of $176m. This compares very favourably with the $129m to $146m order book range of FY08-FY11. With this positive outlook, we expect the base-case scenario of 1.5¢ dividend to be easily maintained.

Very strong balance sheet prompting increasing core dividends. KWAN?s balance sheet is solid with a net cash of $21.5m (23% of the market cap). As the core businesses no longer require much capital expenditure, KWAN has been aggressively returning cash to shareholders ? dividends grew by at a CAGR of 82% over the last five years. At the current 1.5¢ dividend,

KWAN still has four years of dividends in its net cash balance.

Valuation: TP $0.40 based on 7.5% yield. DDM/DCF values of $0.40/$0.44. We value KWAN at $0.40 based on a dividend yield of 7.5%. This valuation ties in very closely with our DDM and DCF values, which are $0.40 and $0.44 respectively, and they incorporate some very conservative assumptions. In this yield-hungry environment, high-yield instruments like REITs have been compressed to a 5.9% average yield.

We believe that early movers into this stock can enjoy both capital gains (+48%) from yield compression and a very attractive sustainable dividend (+11%) for a total return of 59%.