Is K1 Ventures worth $1.00?

One of the most over-looked value stocks in Singapore’s stock market, K1 Ventures is giving out a huge Chinese New Year Hong Bao to its investors. Amid the bearish stock market sentiments, K1 Ventures is rewarding shareholders $0.21 dividend per share, even though it recorded a loss of $8.47 million for 2Q 2016. Notwithstanding this, I am sold on the company’s performance and bought the stock at $0.965 based on the management investment track record. In this article, I will share how to derive my entry and exit level for K1 Ventures.

K1 Ventures’ proven record

Since the Greenstreet Partners assumed management responsibilities within K1 Ventures, they have distributed $0.35 per share or $742 million, a “frightening record” that is extremely difficult to match in Singapore market, given the fact that K1 Ventures used to trade at $0.20 to $0.30 range. The company choose to be low profile all the while and thus, has been overlooked by many SGX investors. Recently, the company underwent a 5-in-1 share consolidation to meet SGX’s minimum trading price requirements, resulting in the share price to be adjusted to $0.90 to $1.00 range.

Ever since the failed management takeover in 2013, the company has been in divestment mode. The management is managing existing investments with a view of exiting within the next few years and returning excess cash to shareholders.  Being a venture capitalist, its core business is not in building business. Instead, K1 Ventures invests in companies that have potential and then turn around the business within 7 to 10 years. So investors must understand the business philosophy before buying this counter. Wealth builders cannot view this company with the same lens as other listed company and use the same metrics to gauge the company’s performance. In this regard, the selling of its businesses should not be seen as a cause for concerns but rather, a realization of assets to maximize returns for its shareholders.

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Motivating factors

I exited K1 Ventures in 2013 and this is my first stock investments in three years. I have to admit that the $0.21 dividend was a motivating factor in my decision to buy this stock. Beyond this, my opinion of K1 Ventures is that it has always been a conservative company and has limited downside risk. After selling Helm Holding Corporation, the Group currently does not have any debts and has a cash pile of SGD126 million. The most attractive thing about K1 Ventures is that its portfolio consists of many quality assets that offer potential upsides. Although it has sold off Helm Holdings, MMR and China Auto Grand, the company still have stakes in Knowledge Universe Holdings (KUH) and Guggenheim Capital.

K1 Ventures’ investment in KUH is an interesting one. The latter has sold its US childcare operations for USD1.5 billion and has also monetized its overseas operations in UK, Singapore and Malaysia, thus, it is expected that K1 will receive additional cash distributions from these sales proceeds. There are many underlying assets of KUH, such as the real estates in some 800 child care centres in the US which are expected to be divested. My estimation value of K1’s stake value in KUH is SGD200 million.

K1 Ventures’ other key investments is its USD100 million stake in Guggenheim Capital which consists of a 7% annual coupon with a conversion option that could potentially deliver a return of 20% p.a. or double its investment cost in five years. This investment is expected to mature in 2017. My estimation value of K1’s stake value in Guggenheim Capital is SGD150million.

Sum of Parts Valuation: $200 million + $150 million + $126 million = $476 million

Estimated value of K1 Ventures’ share price = $476 million / 443 million shares = $1.07

Target exit price: $0.90

The above illustrates the process on how I derive my entry and exit levels for stock investments. The estimation is subjective because you would not be able to accurately derive the price that the buyers are willing to pay for K1 Ventures’ assets.

Readers should not misconstrue this article as a form of investment advice nor an inducement to buy this stock. I am vested in this stock, thus my views may be biased towards the company. Stock investments involve risk and investors need to know that they may lose their capitals in stock trading.

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Magically yours,

SG Wealth Builder

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