Wednesday, March 22, 2017

Relooking into K1 Ventures Limited

I used to hold shares of K1 Ventures Limited.  In fact, it formed a large part of my portfolio.

A few months ago, I liquidated all my shares at the price of 95 cents per share. 

My reason at that time was that the share price was more or less the same as the remaining value of the asset.

There was no benefit to continue to hold the shares if I were to get back just 95 cents per share upon the full winding up of K1 Ventures Limited.

I missed out on the capital reduction and dividend given out in November 2016.

Now that the share price of K1 Ventures has dropped from 86 cents to 70 cents. I have to review the stock.

Is K1 Ventures worth 70 cents? 

The sentiment on the market seems to focus on the book value of 44 cents per share.

The shareholders of K1 Ventures will vote on 29 March to decide if they want the company to sell off its holdings of KUE 3 LP and Guggenheim Capital LLC.

Many people sold off the shares because the share price of 86 cents was way higher than its book value of 44 cents.

I do not agree with the approach of using book value.  Book value is historical value.  It refers to the price that K1 Ventures bought the assets years ago.

Nobody in the right mind will buy an asset based on book value.

If you buy a house from an owner who has lived there for 20 years, you will not buy the house based on the price he had bought 20 years ago.

You will buy based on current market value.  You do not care if the owner bought the house at the price of $30,000 or $50,000 when the market value is $500,000.

That is why I decide to take a look at the EPS of K1 Ventures. 

The buyers will definitely base on the historical earnings to determine the potential earnings of the asset.

The EPS of K1 Ventures for the last quarter from 1 Oct to 31 Dec 2016 is 1.53 cents.  The half year EPS is 3.95 cents.

I rather take the lower figure of 1.53 cents per quarter.  That means the earnings per share is about 6 cents on an annual basis.

The current share price is about 12 times the earnings per share.  This is the PE ratio.

That is a reasonable price as the S&P 500 index is trading at the PE ratio of 25.  Hopefully the assets will be sold at PE ratio above 15.  After the effect of taxation and currency exchange, shareholders can still get back more than 70 cents per share. 

The next question is: when to buy?

Selling assets take time.  I do not know if there are ready buyers.  If yes, are these private or public companies?

It will take longer to complete the sale to a public company.

The buyer has to hold EGM to seek the approval of shareholders.  The next step will be regulatory approval, and to arrange for financing matter.

If the buyer is a large fund, it will save a lot of time. 

The fund manager still has to seek regulatory approval, and arrange for financing, but there is no need to seek shareholders’ permission.

No matter what, it will take up a few months before cash is available for distribution to the shareholders of K1 Ventures.

That is why I am in no hurry to grab the shares of K1 Ventures at 70 cents per share.

It is better to wait and see if the remaining assets can be sold at a higher PE.