Kingsmen Creatives

[corydorus]

Interesting information from 3FS. Well do your own home work.

Extracts from 3FS Blog

"Free cash flow remains highly in the red but that's because they've purchased a building premise earlier in the year and not because their capex requirements are high."

"The management has strongly asserted that the 2H would be much stronger, so I do expect the majority of the revenues to come in the 2nd half of the year."

[Musicwhiz]

Kingsmen has just made two announcements today - a minor one and a major one.

The minor one is that of the acquisition of an additional 5% stake in Kingsmen Ooh-Media Pte Ltd for a consideration of $49,000, taking Kingsmen's stake from 65% to 70%. The principal activities of Kingsmen Ooh-Media are those of advertising services, consultancy event management and marketing communication and the principal activities of its subsidiary are design consultancy, project and events management, and provision of special design and construction facilities to exhibitors.

The other more significant announcement is that Kingsmen has finally purchased leasehold land to construct their new HQ! They are acquiring 5,251 sqm of space for approximately $7,068,000 and intend to construct a multi-storey building on the Property. No construction cost was specified but I think this should be in the range of $20m-$25m. Once completed, this will ease pressure on rentals which have depressed margins, and Kingsmen will only have to recognize the D&A on the new building.

Most importantly, the new HQ will ease the pressure on the Company's expansion as they are currently space-constrained, thus limiting their ability to expand their team and to take on significantly more new contracts.

I see this as a good catalyst for the long-term growth of Kingsmen, even as we celebrate the nation's SG 50 this year.

[Kelvin]

Dropped so much

[Stephen]

Dropped so much

Anyone has any news?

[natnavi]

As long as fundamentals don't change, I don't think there is anything to worry.

By the way, if anyone has any insider's news, they won't say it here.

(vested)

[ksir]

Can always read the latest quarterly result to know why?

<minor holding>

[RBM]

My presumption is that today we have seen Mr. Market's reaction to Kingsmen's announcement of their Q3 results yesterday evening. While the results were generally disappointing, I am personally heartened by four things:

1. Nine months revenue is only down < 6% and Management have been able to trim sales costs by > 4% (is this so disastrous??) 
2. The Exhibitions & Museums division, so critical to Kingsmen's fortunes, continues to grow profitably - look at the 9 Months vs. 9 Months figures - e.g. revenue up S$ 17 Mln
3. Management appears to be implementing a focused plan to deal with the cooling of their high end luxury retail business - they are now chasing ID's and refits etc. in the "affordable luxury" retail sector and their Q3 announcement mentions several new customers in this regard.
4. Kingsmen expect the gains from > S$ 300 Mln of business to be realised in Q4: I hope I have read this correctly - in any event Q4 is a traditionally strong quarter for Kingsmen  

I suppose, in retrospect, the BoD's decision to reduce their long standing S$cents 1.50 interim dividend three months ago (to S$cents 1.00) was a louder signal than perhaps many of us, including myself, interpreted it to be at the time. For me, the BoD's decision-making in February 2016 vis-a-vis the Final Dividend will be a key indicator of how they see Management's ability to address the ongoing performance dip. With the amount this debt-free company has in the kitty, I would hope (and it is no more than hope) that they stick with S$cents 2.50 per share.

Like others, I have become used to year-on-year (and even quarter vs. quarter) growth in Kingsmen's bottom line. Personally speaking, I remain confident in Kingsmen's (proven) Management's abilities - how they manage the current challenges will, I concede however, be another key litmus test. My sense is that today's almost 10% sell-off was an over-reaction by Mr. Market - this is a buying opportunity.

Vested (and for a long time), RBM

[Musicwhiz]

WARNING: LONG POST

Kingsmen's latest results was, at first glance, a big shocker. The Company has only seen growing revenues and net profits in the last ten years, from 2005 till now, although net profit stagnated somewhat in the 2010-2011 period until Kingsmen managed to grab more theme park contracts, which represented a new phase of growth for the Company.

Building on what RBM has said in his post, the numbers review would make it look obvious that Kingsmen is a victim of what could be called "reverse operating leverage", being unable to cut its fixed cost layer fast enough to respond to changing macro-economic circumstances. Therefore, what started out as a mere -11.8% fall in revenue for 3Q 2015 flowed through into a -83.6% fall in NPAT. I actually went through each line item in Kingsmen's P&L and concluded that it was a confluence of factors which came together to depress net margins and caused the seemingly huge fall in NPAT. I shall dissect it below.

1) The M&E division's -7.8% drop was not steep and could simply have been a timing and recognition issue as revenues from theme park projects and events can be lumpy. The retails and interiors division's decline of -10.2% for 3Q 2015 (and -20.7% for 9M 2015) is obviously a more pervasive phenomenon which had been flagged out by the Company in the last 3 quarters - luxury retail simply isn't growing anymore and many brands are holding back on expansion plans due to the slowdown emanating from China.

2) The Company has been able to shift towards fitting out affordable luxury outlets and travel retail to make up for some of the shortfall from the loss of business from luxury retail, but seeing how the overall consumer retail environment is weak (as evidenced by profit falls in OSIM and Bread-Talk, and incurrence of losses by FJ Benjamin, the Company is not able to patch up the hole left behind. Kingsmen has been innovative enough to even fit-out F&B outlets in order to keep the order book flowing.

3) Order book is $348m for 3Q 2015, of which $305m will be recognized (87.6%); this compares to 3Q 2014 where order book was $395m of which $318m will be recognized (around 80.5%). One can immediately see that this is a drop of merely -11.9% in order book (mirroring the 3Q 2015 yoy fall in revenue), and just a -4.1% fall in project revenue recognition. Hence, the problem here is NOT a lack of projects or orders; it is more of a problem with costs and expenses. My thesis revolves around Kingsmen being able to continually capture projects as they are the leading and premier contractor and fit-out specialist for events, museums, theme parks and high-end retail; and from the above numbers, the thesis has NOT been invalidated.

4) Which brings me to the line items of expense within the Profit and Loss statement. The first culprit would be the gross margin (GPM), which had fallen from 24.7% in 3Q 2014 to 23.4% in 3Q 2015. While a specific explanation was not provided, it had been reiterated before that GPM for larger contracts and for theme park projects was lower than the traditional plain vanilla M&E projects, as well as Interior contracts. Hence, the drop in GPM resulted in GP falling a greater -16.6%.

5) Depreciation had increased by 7.5% because of the purchase of K-Fix in Johor Bahru in 1Q 2015 for around $15m. This had subsequently bumped up PPE in the Balance Sheet from $11.4m as at Dec 31, 2014 to $22.7m as at Sep 30, 2015. Moving forward, the depreciation should remain at such elevated levels and the year-on-year effects should start wearing off next year, and until the new HQ is completed (more on this in a later point).

6) The next and most major line item would be staff costs, which has decreased by a mere -5.5% yoy in 3Q 2015 even though GP has gone down by -16%. Kingsmen is obviously taking some steps to reduce staff costs even though for 9M 2015, staff costs actually still ROSE +2.4%. The problem with staff costs had been flagged out for many years, and is a consequence of the Company growing and expanding its team of designers and project managers and incentivising them to focus on margins and returns, rather than just top-line. Note that because of the inability of the Company to relocate to a larger HQ, it was also unable to take on additional contracts and therefore had to think of innovative ways to cut costs. This would be the principal culprit in terms of depressing the net margin.

7) Other expenses would have remained constant if not for the recognition of exchange loss of $0.3m, which bumped up 3Q 2015's other expenses by +9.5%.

8) Finally, the increased bank loans taken up by the Company to finance the purchase of K-Fix has also resulted in a significant rise in finance costs of +140% (albeit off a low base) from $58,000 to $139,000. All these items combined to act together to depress net margin, which registered at a low 0.7% instead of Kingsmen's usual 5% to 6%. It also did NOT help that share of losses from associates increased nearly 4x due to weakness in peripheral territories in which Kingsmen owns associates.

Kingsmen has still managed to maintain a relatively strong Balance Sheet with gross cash of $68.3m and net cash of $54.6m, despite the poor results recorded for the last two consecutive quarters. I also note that cash flow has been particularly weak in 9M 2015 compared with 9M 2014, as less cash was received through receivables in working capital as well as gross amounts billed for contracts work in progress.

Kingsmen's strongest quarter is 4Q, though this year should see a relatively more muted final quarter as the weakness was worse than expected. Because of these cash flow issues, and due to the higher commitment required for their soon-to-be-constructed new HQ, I expect the final dividend to be reduced from last year's 2.5c to just 1c/share. This implies a full-year dividend of just 2c/share and represents a dividend yield of 2.8% at the last closing price of 71c.

The Company continues to be the market leader in capturing business for the MICE sector, and will continue to see demand for its services for the numerous theme parks to be set up in the region, including China, Korea and also the Middle East (e.g. 20th Century Fox theme parks). China is also planning to go on a building spree to construct more theme parks in order to boost domestic consumption and attract higher levels of tourism, and this should augur well for the Company. Kingsmen also has the flexibility to do different types of jobs for Interiors to tide through slow times, and they have seen their share of slow demand as the 39-year old company has been through numerous downturns (from AFC, to SARS and GFC). The recent sell-down makes the Company attractive if one has a ten-year view for Kingsmen and how they can position themselves to be the market leader in the provision of such services (alternative marketing). Even Cityneon is not doing as well and recently had to do a rights issue to purchase an asset in the USA; and had to restore its free float above 10% to continue to stay listed.

As for its new HQ as announced previously, Kingsmen may have to spend around $20-30m building it, and this will come from FCF as well as a higher level of debt. I would expect to see less cash being available for dividends for 2016-2017, but with a view to a higher level of business activity from 2018 onwards (don't forget that JEWEL at Changi Airport should be coming on stream 2019). I continue to have faith in Management's vision, which was articulated many times to be through the various AGMs in which I have met Benedict Soh and Simon Ong, and the close communication and news updates provided by the COO Andrew Cheng.

I invest in Kingsmen due to the Company's strong moat in this industry, and also because of its ability to tackle hard times and be flexible and adaptable to changing trends. Other companies are also subject to challenges and one has to know how to evolve in order to stay relevant; and I dare say Kingsmen is adept at exceeding customers' expectations and ensuring a win-win outcome. The quality of the Management team, their resilience in the face of tough times and their prudence and conservatism in running the business allows me to sleep well at night, in spite of obvious headwinds which seem to have no end in sight.

Therefore, I remain steadfastly a shareholder amid the market turmoil and pessimism.

[ksir]

Thanks Musicwhiz for details long post. It has been a long while since your last long post.
I concur with you & RMB on the quality of Management and their interest alignment with minority shareholders.
Don't forget almost all Key Management Personnels own rather substantial stakes in Kingsmen.
I personally divested 80% of my stakes when they cut the dividend, mainly due to:
1. Margin on M&E unit remains low, probably Theme Park business margin is pretty low as well. This is after several years of learning curve (from 2008 RWS project cmiiw).
Theme park project margin improvement is one of my main expectation in investing in Kingsmen.
2. Retail project margin is probably already peak (luxury stores should have better margin, imo). During 2010-2013 period, demands were tremendous and hence Kingsmen was able to handpick projects with higher margin (as mentioned by Mr Soh). Even then, the margin was not really high. Now with depressed demand, it's likely to have lower margin.

I respect and eager to invest in such a quality Management team, but not the industry.
Below quote from Buffett crossed my mind when I decided to divest (Pardon me for the generalization):

"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

<minor holding>

[natnavi]

Hi ksir, I do think that Kingsmen Creative does not apply to that quote. The quote would describe a company that is in a sunset industry, such as a company that sells newspaper or a company that sells typewriter.
Kingsmen Creative makes other companies that sell products to the average consumer look good, and there will always be a demand for such talent, especially if these companies intend to attract customers.
If you look at how things are progressing around the world, things do not look particularly bright. Companies are not doing much major renovations, and I suspect it is because they know that the economy is slowing down at this point of time.
When the economy starts to get back on track, Kingsmen Creative will start to do well again.

(vested for the past five years and will carrying on being vested)