k1 Ventures Ltd - How much did it lose on Long Haul Holding investment?

11/3/2014 - k1 Ventures Ltd is selling its 80.1%-owned subsidiary Long Haul Holding Corp to Wells Fargo Bank for US$152 mln (S$192 mln) cash.

The key asset of Long Haul Holding Corp is a 100% stake in US-based transport leasing company Helm Holding Corporation.

The sale is in line with management's guidance to hold back on new investments, to focus on managing and selling existing ones.

But having read the announcement we are still left with several questions we feel need to be asked.

We have sent all these questions to the company and received a reply from their investor relations department.

While we were assured via email that we would receive answers, we are yet to hear from them.

If and when we hear from the company, we will update this article.

In the meantime, here are our questions:

First, we are not clear how much cash it made, or lost, in acquiring an effective 80.1% stake in Helm Holding Corporation for S$726.5 mln in 2005, operating it for almost nine years and now selling it for S$192 mln.

Second, the disposal of Helm Holding Corp appears to be a "major" transaction, yet the requirement for shareholders’ approval was waived.

Third, media reports suggest that the US-based companies in which k1 Ventures Ltd is invested, are facing lawsuits.

Before we explore the details, let's look at the company's recently announced earnings for Q2 FY14:

Revenue: -57.1% to S$20.8 mln
Profit: -97.5% to S$0.7 mln
One-off gain: S$1.5 mln vs S$1.9 mln
Cash flow from operations: S$12.6 mln vs S$35.3 mln
Dividend: Nil vs 1 cent per share

Revenue was lower due to a 91% drop in investment income from Knowledge Universe Holdings LLC.

That was partially offset by a 2.5% rise in the transportation leasing business of Helm Holding Corp in US.

Its profit was sharply lower due to a 19.1% rise in finance costs and a 15% drop in share of profits of associates and joint ventures.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Should the sale of a company be counted as revenue?

k1 Ventures Ltd's revenue is made up of income from transport leasing business, proceeds from sale of investments, investment income and interest income (refer pages 55 & 67 of FY13 annual report).

In FY13, its revenue included S$55.6 mln proceeds from sale of investments.

During that year, it sold a 1.43% stake in McMoRan Exploration (MMR) for S$49.1 mln.

A quick look at its FY13 annual report (pages 43 & 62) reveals k1 Ventures Ltd's investment in MMR was recorded as a non-current asset in its balance sheet.

That means, the company sold a long term asset and recorded the proceeds as revenue in its income statement.

Now that seems a bit odd when compared to the accounting style of other investment-holding companies.

Hotung Investment Holdings Ltd is one such investment-holding company.

According to pages 44 & 64 of Hotung's 2012 annual report, its auditor, KPMG, has booked only the gain/loss from sale of investments as the company's revenue.

In other words, KPMG doesn't find it appropriate to book entire sale proceeds of investments as the revenue for the company.

Therefore that makes us wonder what would be the right approach to recognise revenue for an investment-holding company.

Ms Ng Peck Hoon at Deloitte & Touche LLP is the auditor of k1 Ventures Ltd.

Question

2. How much cash has it earned, or lost, since acquiring Helm Holding Corp?

k1 Ventures Ltd acquired an effective 80.1% stake in Helm Holding Corporation for US$472 mln in July 2005.

This was the equivalent of S$726.5 mln, according to k1 Ventures Ltd's FY06 annual report (page 68).

At that time, Helm Holding Corp was said to be the largest locomotive operating leasing company and the largest independent railcar leasing company in North America.

As on December 31, 2004, Helm Holding Corp had a fleet of 795 locomotives and 19,847 railcars.

Compared to the sale price of US$152 mln (or S$192 mln), k1 Ventures Ltd seems to be making a loss of US$320 mln (or S$534.5 mln) on its investment in Helm Holding Corp.

But that ignores the performance of Helm Holding Corp in the last nine years.

Helm Holding Corp recorded a profit before tax of S$32.9 mln in FY06 (refer page 104 of FY06 annual report), S$27.5 mln in FY07, S$68 mln in FY08 (refer pages 86 & 87 of FY08 annual report), and S$4.4 mln in FY09 (refer page 82 of FY09 annual report).

But in FY10, Helm Holding Corp recorded a loss before tax of S$26.4 mln (refer page 80 of FY10 annual report), which was followed by a S$0.7 mln loss in FY11 (refer page 78 of FY11 annual report).

In FY12, Helm Holding Corp recorded an even wider loss before tax of S$56.4 mln (refer page 78 of FY12 annual report).

In FY13, Helm Holding Corp swung back into the black with a profit before tax of S$3.7 mln (refer page 76 of FY13 annual report).

Together, that adds up to a net profit before tax of S$53.1 mln since k1 Ventures Ltd acquired it in 2005.

And k1 Ventures Ltd's 80.1% share of that works out to be S$42.5 mln (also refer to page 21 of FY09 annual report).

In a nutshell, k1 Ventures Ltd's S$726.5 mln acquisition of Helm Holding Corp yielded a net profit before tax of S$42.5 mln over a period of nine years.

And now, k1 Ventures Ltd is selling its entire stake to Wells Fargo Bank for S$192 mln.

On the face of it, k1 Ventures Ltd appears to have lost a significant amount in acquiring, managing and now disposing of Helm Holding Corp.

In the absence of specific cash flow details, we wonder how much cash did it actually lose, or make, over the life of its investment in Helm Holding Corp.

(Total number of questions in the full story: 12)

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