Kingsmen Creatives

As part of Orchard Road's facelift, Shaw Centre will undergo a transformation by 2014, which should see international brands coming in, and creating opportunities for Kingsmen's Interiors Division....

Shaw Centre to undergo major revamp
21 February 2013 2106 hrs (SST)
URL : http://www.channelnewsasia.com/stories/s...28/1/.html

SINGAPORE: Shaw Centre, a landmark building at Orchard Road, is up for a major facelift -- its first in almost three decades.

The renovations are expected to be completed in the first quarter of 2014.

After the redevelopment, the Shaw Centre retail mall will be integrated seamlessly with the adjoining Shaw House.

Shaw House's anchor tenants include Isetan and Shaw Theatres Lido.

The new Shaw Centre will also feature a two-storey high glass retail frontage with verandahs for merchandising.

Other key changes include a new basement food court that links Shaw Centre and Shaw House, and a new 1,000-square-metre Urban Plaza built over the public concourse formerly located at Shaw House.

Shaw Brothers said the space will be used for red carpet events and product launches.

Rental rates are expected to be comparable to nearby retail spaces at the Orchard Road and Scotts Road junction, said Shaw Organisation.

Mark Shaw, Shaw Organisation's executive vice president of operations, said: "What we're looking to do is to attract international flagship brands to come to Shaw Centre because we're one of the last few remaining buildings with good Orchard Road and Scotts Road frontage.

"We're looking at a few restaurants and obviously a lot of retail clients. We hope that the new food court will also bring in a lot more traffic -- so what're we doing is to complement that with retail tenants that attract the same sort of shopper profiles that we have in our cinemas."

Shaw Organisation's executive vice president of film distribution, Christopher Shaw, said the proposed renovations will align Shaw Centre's positioning and target audience with that of Shaw Theatres Lido.

"This revamp and the new tenant mix will reflect our aspiration to bring a quality experience to our patrons and allow them to have plenty to do prior to and after their movie," he added.

- CNA/al

Full year result is out.

NEWS RELEASE
KINGSMEN’S FY2012 NET PROFIT INCREASES TO S$17.1 MILLION
- Revenue increases 11.2% to S$290.3 million
- Net Profit increases 4.9% to S$17.1 million
- Growth driven by strong demand for the Group’s services
- Expects growth momentum to continue
- Proposes final dividend of 2.5 cents per share
- Total dividend for FY12 at 4.0 cents per sh

Looking thru Kingsmen's FY 2012 Results Statement, issued early yesterday morning, IMHO it is difficult to find any weakness in the performance of any of their divisions - and Management speaks very positively about the outlook for the company's prospects. That may explain the rally in Kingsmen's share price since the results announcement - I noticed for example that one large trade was done at the S$ 0.80 level in the last hour of today's trading on the SGX.

My only disappointment was the level of the proposed final dividend - on that score Musicwhiz's prediction has (again) been proven spot-on, my optimistic aspiration not-delivered-on. That said, Kingsmen shares now trade on a 5% dividend yield - more than respectable .......... and more than rival Pico Far East's current dividend yield (although Pico has had a superior share price run in recent months). I can't figure out however, why Kingsmen will only pay shareholders their final dividend in mid June. What am I missing here?

Maybank Kim Eng have issued a bullish, if typically shallow, analyst piece on Kingsmen, beating their chests about having the highest Kingsmen target price (S$ 0.96) on the street.................

http://www.remisiers.org/cms_images/rese...103131.pdf

Musicwhiz: Please note the assumed dividend increase in respect of FY 2013!!

Looks like the only potential clouds on the horizon are:
a) any further "discoveries" of irregularities, following the mid January announcement, and the damaging reputation harm that this could cause, and
b) competitive threats (e.g. from Far East)
But so long as there is sufficient work to go around, it is the former that will be of main concern to shareholders.

I note that a US based private equity fund has taken a substantial stake in rival Pico Far East (without declaring it on a timely basis by the way). I wonder when the quality of financial results and sustained growth that Kingsmen produces year-after-year will attract similar interest??

Vested

(01-03-2013, 11:03 PM)RBM Wrote: Looking thru Kingsmen's FY 2012 Results Statement, issued early yesterday morning, IMHO it is difficult to find any weakness in the performance of any of their divisions

What do you think of the E&M division?
The pbt margin was 4.2% (lowest since 2008, when they ventured into theme park business).
I'd think that after 2008-2011 learning curve, it should be more efficient and pull out better margin or at least maintain the 6-8% margin?
Do note that pbt was also the lowest since 2008.
That's my first concern.

Secondly, despite the optimistism of the management.
Orders won thus far was $81M, compared to last year (same period) of $100M+.
Even 2-3 years ago, orders were around $84M.

I would rather let the figure speaks louder than the "nice crafted words".
Having said that, i am aware of the tough labor environment & hence higher cost, but management didn't even mention that?

(Still Vested)

WARNING: LONG POST!

Hi RBM,

Thanks for your take on Kingsmen's results. Certainly, there are quite a few aspects to worry about, and I shall highlight these here (plus the positives) and also give my take on how we should go about interpreting the numbers.

1) As valuestalker had mentioned, though E&M division saw a revenue increase of +9.8%, segment profit actually fell by -27.9% to $4,561k from $6,328k. Segment margin dropped from a healthy 6.4% to 4.2%. This is definitely cause for concern, as Kingsmen always mentions that thematics are the way forward for the Company to grow. Sadly, they did not give a plausible explanation for this severe dip in margins and the drop in profitability. If this trend continues, then it would be tough to see Kingsmen improve on profitability just by clinching more thematic/scenic contracts, no matter how attractive the contract sums may be. I think this should be brought up at the upcoming AGM and a reasonable explanation sought.

Historical segment margins for Kingsmen's E&M as follows:-

FY 2003 - 6.2%
FY 2004 - 3.6%
FY 2005 - 5.3%
FY 2006 - 3.9%
FY 2007 - 10.7%
FY 2008 - 8.1%
FY 2009 - 6.8%
FY 2010 - 7.1%
FY 2011 - 6.4%
FY 2012 - 4.2%
10-Year Average = 6.2%

One should note that for FY 2012, this division has dipped below the 10-year average, thus sounding a red flag!

2) On a positive note, the Interiors Division seems to be performing better than last year. Though revenues "only" grew +10%, segment profit managed to grow by +29.5% and segment margin improved from 8% to 9.4%. I suspect this may be due to their roll-out Management program which enables them to command better pricing power compared to smaller contractors, and also gives them bargaining power in terms of margins as they have the expertise, scale and quality to undertake such complex projects. Their list of clients continues to grow impressively and it looks increasingly likely that this division will dominate Kingsmen's profits moving forward, rather than E&M. There was again no mention of fixtures export which used to take up a significant chunk of revenues and which garnered very respectable margins. Note too that Interiors took up 54.6% of revenues, up from 49.6% in FY 2011. This is the third consecutive year that Interiors took up a greater % of revenues compared to E&M division, and this is a good thing if you consider the margins for Interiors being superior to that of E&M.

Of course, the pertinent question now for shareholders is- which division has more scalability and growth potential moving forward? Notice from the press release (under outlook and prospects) that Kingsmen touches on both E&M and Interiors and is bullish on both. So there is a reasonable chance that both divisions can grow in tandem, though to procure exact growth rate projections may entail a face to face meeting with the CEO and MD.

Historical segment margins for Kingsmen's Interiors Division as follows:-

FY 2003 - 4.4%
FY 2004 - 2.6%
FY 2005 - 3.5%
FY 2006 - 6.7%
FY 2007 - 7.4%
FY 2008 - 11.3%
FY 2009 - 9.3%
FY 2010 - 10.2%
FY 2011 - 8.0%
FY 2012 - 9.4%
10-Year Average = 7.3%

The reverse is true for Interiors - FY 2012's segment margin is above the 10-year average and is a reason to rejoice, though the exact reasons must also be ascertained to ensure it is not a temporary phenomenon.

3) I was actually surprised that Research and Design (R&D) division saw good growth of +19.1% in revenues and +16% in segment profits. This is the under-stated but up and coming division in Kingsmen's stable as the segment margin is an impressive 31.7%! I am not sure how they managed to achieve this as historically, margins for this division have been dismal, to say the least. If Kingsmen can grow this division strongly, it could potentially become the new profit driver. Why do I say that? R&D made up just 3.5% of revenues but formed 13.9% of segment profits! I noted that no analyst made mention of this division as the Company itself just had a one-liner, but I believe this division could become a potential star in future once we dissect the numbers.

FY 2003 - 3.5%
FY 2004 - 0.9%
FY 2005 - 4.6%
FY 2006 - 21.4%
FY 2007 - 20.6%
FY 2008 - 28.3%
FY 2009 - 23.1%
FY 2010 - 21.6%
FY 2011 - 32.5%
FY 2012 - 31.7%
10-Year Average = 18.8%

Clearly something happened in FY 2006 to cause segment margins to jump so significantly. It would be interesting to show Kingsmen these numbers and find the reason why! The jup from FY 2010 to FY 2011 is also equally impressive. If they can keep margins around the 30% range and continue to grow top-line, this division may eventually form>20% of profits.

4) Alternative marketing, despite its cool-sounding name, appears to be the worst performing division for Kingsmen. Revenue increased by +41.5% from a low base, and segment profit rose 3.6x also from a low base of $101k to $468k. Segment margin was dismal at just 3.7%, the lowest of all the divisions. One has to ask if Kingsmen is earning above its cost of capital for this division. I understand that this division necessarily complements the other divisions within Kingsmen's stable of businesses, but one has to take a long hard look and ask if margins have hope of improving further, and the steps to be taken to achieve this. Is it an issue of manpower costs, less pricing power or more competition?

5) The fact that order book was lower at $81m compared to previous year's $106m may be attributed to timing differences, and is not a cause for concern for me. 1Q is traditionally the slowest quarter and therefore we should see some dip in revenues and profits, which should subsequently pick up as the year progresses.

6) Another strong point was the FCF generation for Kingsmen for FY 2012, which hit a historical high of $28.3 million. The previous high was achieved in FY 2008 and it was only around half the amount at $14.5 million. Capex requirements remain very low for the business at just around $2 million a year, but note that this could increase significantly as the Company plans to build its own new headquarters rather than continue to rent; and its lease on its current building expires in 2016. This would imply that it would need to source for and start construction of a new facility as early as possibly 2014 as construction may take around 18-24 months to complete. It would be good to question Management on how much would be set aside for this new building, the capacity it can hold (in terms of staff strength), the GFA compared to current (e.g. 2x, 2.5x?) and the timeline for construction and completion.

7) Which brings me to my next point about dividends. I was going to mention that according to my spreadsheet, Kingsmen appears to have a policy of freezing dividends for two years before raising it, notwithstanding any special dividends along the way. Payout ratio has hovered around 45% on average for the last 4 years, and if you are expecting a 4.5c full year dividend then it would imply EPS has to be 10c/share. Considering FY 2012 EPS is just 8.94c/share, NPAT would have to jump about +11.8% for this to happen. Looking at yoy NPAT growth of about 5% for FY 2012, I would think that is optimistic! My point about the Company needing to conserve cash for its new building should also factor in here - cash balance has hit a new all-time high of $53.1 million and if nothing goes wrong, is set to rise further. Management may just decide to pay out something special this year but I am not crossing my fingers on that.

Dividend History

FY 2003 - 0.75c Final
FY 2004 - 0.70c Final
FY 2005 - 1.00c Final
FY 2006 - 1.50c Final, 0.50c Special = 2c Total
FY 2007 - 2.00c Final, 1.00c Special = 3c Total
FY 2008 - 1.50c Interim, 1.50c Final = 3c Total
FY 2009 - 1.50c Interim, 2.00c Final = 3.5c Total
FY 2010 - 1.50c Interim, 2.00c Final, 0.50c Special = 4c Total
FY 2011 - 1.50c Interim, 2.50c Final = 4c Total
FY 2012 - 1.50c Interim, 2.50c Final = 4c Total

It can be seen that starting from FY 2007, dividend remained constant for two years before rising by 0.5c the following year. FY 2007-2008 saw 3c/share total, FY 2009-2010 saw 3.5c/share total (exclude the 0.5c special for their 35th Anniversary) and FY 2011-2012 saw 4c/share total. If we follow this simple pattern, could we forecast an increase in dividend for FY 2013 to perhaps 2.0c interim and 2.5c final for a total of 4.5c?

Note that I have laid out some of the aspects of Kingsmen which I feel are worth mentioning, there may be more to focus on like increase in share of profits from associates of +134% (set to continue??).

KE have written their usual bullish report (as you pointed out) with a TP of 96c. Their forecast is for EPS of 10.1c and for Kingsmen to trade at a PER of 9.7x, with a forecast dividend of 4.5c/share. I agree - too bullish on ALL measures! DMG on the other hand are more subdued and conservative. EPS is forecast at about 9.42c/share with a target of 7x ex-cash PER for a TP of 93c; dividend assumes to remain the same at 4c/share. Interestingly, when cash starts to pile up, ex-cash PER would also come down and thus assigning an ex-cash PER of 7x does seem rather aggressive (currently Kingsmen is trading at 5.4x ex-cash PER). We can wait for AmFraser's report but I believe it will be as bullish as Kim Eng's.

So would there be a margin of safety at this level? If we assume a very prudent +5% rise in NPAT and hence EPS to about 9.39c/share, and also a conservative PER of about 8x for the business, then fair value for Kingsmen appears to be around 75c, which would imply the current closing price of 79.5c offers no margin of safety if things go wrong. Unless there are positive surprises on the contract clinching or overall margins, I would think most of the positives have been priced in.

Regards.

(02-03-2013, 02:06 AM)Musicwhiz Wrote: So would there be a margin of safety at this level? If we assume a very prudent +5% rise in NPAT and hence EPS to about 9.39c/share, and also a conservative PER of about 8x for the business, then fair value for Kingsmen appears to be around 75c, which would imply the current closing price of 79.5c offers no margin of safety if things go wrong. Unless there are positive surprises on the contract clinching or overall margins, I would think most of the positives have been priced in.

Regards.

Thanks MW for ur thorough analysis. You noted the intrinsic value to be 75 cents. You projected only one year into the future. Since you are going to keep it for long-term, wouldn't it be more prudent to project it at least five years into the future? No doubt you will get a higher intrinsic value and we shouldn't be too excited by a higher price. Just wondering if projecting just one year is too short-term and hence, not giving a chance to go in if the fundamentals are still intact (other than the dropping margins for E&M). It's still yielding around 5% at current price. Comparing this yield with the REITs and latest Mapletree China IPO, 5% is very decent.

Hi FFN,

Thanks for your comments. The reason I was using a "one-year forecast" was just to compare the forecasting methodology to the two analyst reports written. I was just illustrating the fact that their target price was too optimistic on many counts - 90+ cents compared to a back-of-the-envelope estimation of 75c/share.

One more point I'd like to make is that the intrinsic value may not be higher just because one chooses to use a 5-year time horizon. No business is expected to grow in a straight line and if there are bumps along the way (with revenue and profit declines), the intrinsic value may not be significantly higher than what it is currently. It all depends on the assumptions we use for growth rates for the Company and the industry.

Thanks!

(02-03-2013, 12:00 AM)valuestalker Wrote: What do you think of the E&M division?
The pbt margin was 4.2% (lowest since 2008, when they ventured into theme park business). I'd think that after 2008-2011 learning curve, it should be more efficient and pull out better margin or at least maintain the 6-8% margin? Do note that pbt was also the lowest since 2008.

Thank you for your response valuestalker - this is excellent push-back - I had overlooked this point. I noticed also in Pico Far East's results that they had suffered eroded margins in this area of their business - I agree with you that the downward margin trend is a concern.

Also thanks to Musicwhiz for his thoughtful posting - very insightful. Looks like you were burning the midnight oil on this one! I do believe that the concern which valuestalker raises merits a question at Kingsmen's AGM, since they did not volunteer a decent explanation for the E&M Margin erosuion in their FY Financial Statement.

I was facsinated by your narrative on Kingsmen's dividend history Musicwhiz - I do worry a bit that that the outright purchase of a New Singapore HQ Office seems to be hanging over Kingsmen like Damocles Sword........ will this restrict the appetite of the BoD to reward shareholders with heightened dividend levels in coming years?

Vested

Hi RBM,

The way I think about Kingsmen's business is like this - it is currently facing "capacity constraints" as the current building is not large enough to house all the required in-house designers and other sales/marketing/admin staff for them to function at an optimal level. This was mentioned before by Andrew Cheng the general manager ("bursting at the seams" was the term he used) and I also witnessed this myself when I took a walk around the premises during last year's AGM - they had converted the previous conference room into office space and added further partitions in order to accommodate more staff, but there was a limit to how much could be expanded!

Think of it this way - for a manufacturing company their capacity for revenues is dictated by their production capacity, which involves the number of factories they have, running at x% utilization, and producing x units of goods every year for sale. In order for capacity to increase due to higher demand, more production facilities or production lines need to be added. This in turn will translate into higher revenues for the Company as it is able to sell more of its products.

For a business like Kingsmen, their human capital forms the basis for bringing in business, revenues and cash flows. For every project they clinch, a project team will be assigned to the client to service their requirements and ensure the project is done smoothly, within budget and with quality. So for Kingsmen to grow their revenues, they therefore have to hire more staff and to do this, they have to construct a larger building (akin to building new factories to produce more products; just that Kingsmen is in the service line). So yes the capex requirement will tie up their cash flows from FY 2014-2016 but the incremental revenues it would bring in would also rise in tandem with the rise in staff strength. Of course, staff costs would also rise as a result but my point is that business growth which is currently constrained would be "freed up" once they complete the new building.

So to see it from a longer-term perspective, this is a "necessary evil" for Kingsmen to grow their revenue base and achieve higher profitability; and once this happens, EPS will rise and dividends will therefore naturally follow suit.

Thank you Musicwhiz,

I buy everything you say regarding Kingsmen's need for a new Singapore HQ. But do Kingsmen really need to build and own the building? Why can't they enter into a (very) long term lease? And if it really has to be a capital expenditure........ surely there are attractive financing options available to the company for this outlay (e.g. bank mortgage loan?, corporate debt raising) rather than directly off its own balance sheet?

In the businesses I have been involved in over the years in Singapore, it was always preferable to either lease rather than buy the real estate we needed to conduct our business. What am I missing here?

Vested

(02-03-2013, 08:25 PM)Musicwhiz Wrote: Hi RBM,

The way I think about Kingsmen's business is like this - it is currently facing "capacity constraints" as the current building is not large enough to house all the required in-house designers and other sales/marketing/admin staff for them to function at an optimal level. This was mentioned before by Andrew Cheng the general manager ("bursting at the seams" was the term he used) and I also witnessed this myself when I took a walk around the premises during last year's AGM - they had converted the previous conference room into office space and added further partitions in order to accommodate more staff, but there was a limit to how much could be expanded!

Think of it this way - for a manufacturing company their capacity for revenues is dictated by their production capacity, which involves the number of factories they have, running at x% utilization, and producing x units of goods every year for sale. In order for capacity to increase due to higher demand, more production facilities or production lines need to be added. This in turn will translate into higher revenues for the Company as it is able to sell more of its products.

For a business like Kingsmen, their human capital forms the basis for bringing in business, revenues and cash flows. For every project they clinch, a project team will be assigned to the client to service their requirements and ensure the project is done smoothly, within budget and with quality. So for Kingsmen to grow their revenues, they therefore have to hire more staff and to do this, they have to construct a larger building (akin to building new factories to produce more products; just that Kingsmen is in the service line). So yes the capex requirement will tie up their cash flows from FY 2014-2016 but the incremental revenues it would bring in would also rise in tandem with the rise in staff strength. Of course, staff costs would also rise as a result but my point is that business growth which is currently constrained would be "freed up" once they complete the new building.

So to see it from a longer-term perspective, this is a "necessary evil" for Kingsmen to grow their revenue base and achieve higher profitability; and once this happens, EPS will rise and dividends will therefore naturally follow suit.