K2 Asset Management Holdings Ltd

Setting for an improved scenario: K2 Asset Management Holdings Ltd (KAM), a junior fund manager has been emphasizing on revenue consistency for the business based on management fees. The group also aims to have fund performance support its performance fees. These can together yield better value for shareholders. While the FY18 FUM decreased, the group’s net exposure to the market has been about 80% for FY18, and its Funds unitholders could witness decent absolute returns. While KAM continued the trend of lower FUM since 2015, the group is now undertaking a targeted approach to manage the decline that emerged owing to negative fund performance, challenges in maintaining strong fund ratings and an industrywide thrust towards lower fees across FUMs. The group is now implementing better operational drivers, and net inflows are becoming positive as seen over the last six months. While no future forecasts have been made by the group, KAM is still positive on medium to long-term performance. The group is now working on its distribution strategy and is formulating better investment themes for unitholders.

Dividend scenario, financials, and FUM figures are yet to improve: The dividend payout rate for the group has been 23% of after-tax profits, and this is below the expectations but falls in line with group’s conservative view on cash. KAM reported for total FY18 revenue of $14.1 million (against $ 17.2 million in FY17) with $5.9 million sought through management fees and $7.6 million through performance fees. The group’s interest income for the period was $211,000 while profit after tax amounted to $5.2 million (against $ 6.1 million in FY17). The Group’s expenses in FY18 were $6.9 million, and this was a reduction based on better efficiencies and managing costs. As per the latest FUM and Fund Performance as at 1 December 2018, the group is yet to demonstrate positive performances. Total FUM by K2 Asset Management amounted to $328.4 Million, which is still not a healthy number.It was mainly impacted by the ongoing political drama that is Donald Trump’s presidency fuelled uncertainty, not only around the global security but also equity markets.


K2 Funds Performance (Source: Company Reports)

On the analysis front, the company has maintained the Net Margin at 37.1% in FY18 which is higher than the industry average of 30.2%. As a result, the company has also generated a significant return for the shareholders with ROE at 40.5% against the industry average of 10.0%. Current ratio indicates good health of the company at 5.88x compared to the Industry average of 1.53x. However, KAM could still manage to see a 1% rise in stock price despite the above FUM update, as on December 03, 2018. Given the heavy fall of 66% in stock price this year to date and bearish trends in the stock price still continuing, we have a “Hold” view on KAM at the current price of $ 0.092 (up 1.099% on December 04, 2018).
 

Donaco International Limited

Subdued performance in FY18 but expect decent earnings in long run: Donaco International Limited (ASX: DNA) is a micro-cap company with the market capitalization of circa $57.65 Mn as on December 04, 2018. The management has recently addressed its shareholders at AGM meeting and highlighted about FY18 activity and future prospect. As per the release, FY18 was a very difficult year with the number of challenges coupled with changes and progress on several fronts. The company recorded a statutory loss of $124.5 Mn in FY18 against profit of $31 Mn in FY17. It was mainly impacted by the Board’s decision to incur a non-cash impairment expense of $143.9 Mn in the value of the Star Vegas casino license, as a result of the breaches of the non-compete provisions by the vendors. Currently, the group is seeking damages of US$190 millionfrom the vendor of Star Vegas casino for being in breach of non-compete provisions in the sale contract. Despite the subdued performance in FY18, the company’s financial position remains strong with positive cash flows of $34.6 million. Additionally, during FY18, the company had reduced the debt to equity ratio to 6.3% from 8.7% in FY17 and intend to reduce further. For that, the company has made further principal repayment of US$8.55 million to Mega Bank in August.

FY18 Key Metrics (Source: Company Reports)

On the other hand, the company disclosed its November month trading update wherein at DNA Star Vegas, the VIP win rate has turned firmly in the Company’s favour. Total rolling turnover is on track to reach a very healthy level of around THB 5.5 Bn with the win rate running at 4.41%. At Aristo, total gaming turnover is on track for an increase of almost 60% from the October month. Based on the current data and the trend, the management expects a 20% to 30% rise in total gaming turnover in December month, and the casino should be back on track and resume to its average volume in early 2019. Meanwhile, the share price has fallen 61.11% in the past three months as of December 03, 2018 and is trading towards the lower range. The group has also been in the quest of seeking damages from the Star Vegas Casino’s vendor in relation to breach of respective sale contract. Based. Based on its FY18 performance along with its strategic plan to improve financials in FY19, we maintain our “Hold” recommendation on the stock at the current market price of $0.069 (down 1.429% on December 04, 2018 post an initial rise ).
 

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