Kingsmen Creatives

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I wonder if a way to characterise Kingsmen's Q3 2012 results, announced earlier this evening, is a "wobble". My personal take on the results:

-ve: Kingsmen's Q3 2012 revenue was 18% down as compared to Q3 2012. Profit after after tax was down over 19%.
-ve: Both the (major) Exhibitions & Museums and the Interiors divisions had revenue declines - the interiors comparison with Q3 2011 looks unfavourable because of Q3 2011 business arising from store fixtures roll-out programmes completed for Polo Ralph Lauren shops and several flagship stores projects at that time. And for YTD 2012, many of the larger projects were completed in 2Q 2012.

+ve: YTD numbers compare favourably with the first 9 months of 2012. Overral, Kingsmen remains on track for a record year in 2012 ............ and hopefully an enhanced level of final dividend.
+ve: The performance of the (smaller) Reasearch & Design and Alternative Marketing divisions was much better than in Q3 2011.

I was pleased to read section 10 of the results announcement: QUOTE The last quarter of 2012 will see the usual fast pace of activities for our Interiors division before the festive season. Besides working on several thematic projects, we will also be engaged with various exhibitions, events and numerous museum and visitor centre projects, which will carry through to next year.

As at 5 November 2012, we have been awarded contracts of approximately S$289 million, of which S$274 million is expected to be recognised in FY2012. We expect 4Q 2012 to be a stronger quarter and FY2012 to be another rewarding year, barring unforeseen circumstances UNQUOTE

May be there will now be a buying opportunity for those wishing to add to their holdings. Personally speaking, I won't let this "wobble" affect my positive view regarding Kingsmen's long term future.

Vested
RBM, Retired Botanic MatSalleh
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(05-11-2012, 07:25 PM)RBM Wrote: -ve: Kingsmen's Q3 2012 revenue was 18% down as compared to Q3 2012. Profit after after tax was down over 19%.
-ve: Both the (major) Exhibitions & Museums and the Interiors divisions had revenue declines - the interiors comparison with Q3 2011 looks unfavourable because of Q3 2011 business arising from store fixtures roll-out programmes completed for Polo Ralph Lauren shops and several flagship stores projects at that time. And for YTD 2012, many of the larger projects were completed in 2Q 2012.

I don't really see it as a negative since Kingsmen's earnings are lumpy. We should always compare full FYs for businesses like Kingsmen.
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3Q 2011, contracts awarded $254 million, $229 million to be recognized for FY11.
FY 2011, full years revenue, $260 million.

3Q 2012 contracts awarded $289 million, $274 million to be recognized for FY12.

Kingsmen has a good chance to reach a revenue of $300 million for FY12.
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We should bear in mind that the nature and timing of Kingsmen's customer contracts - especially the bigger ones - do affect the quarterly financial numbers.

Bearing in mind Kingsmen's latest (as at 5Nov12) awarded contracts of approx. $289.0m (of which $274.0m is expected to be recognised in FY12 ending 31Dec12) - itself already some 14% ahead of the corresponding figure of last FY11 - it is reasonable to expect the group's business volume and profitability to sustain into FY13 and beyond.

We should also bear in mind that in a busy 4Q of last FY11, Kingsmen achieved a revenue of $82.28m and a PBT of $7.03m. By just repeating the same performance in this expected busy 4Q, Kingsmen would be again posting record revenue and PBT for FY12 when the full-year results are released in Feb13. By simple extrapolation, I am betting on a full-year PBT of close to $20.5m, which would bring a NP of close to $17.5m (FY11: $16.76m), translating to a full-year EPS of $0.091 (FY11: $0.0856), based on the latest 191.646m outstanding issued shares.
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Thanks RBM for such a concise summary of Kingsmen's 3Q 2012 results. Suffice to say I was rather taken aback at the numbers, for reasons which I will detail below. The headline numbers in the Income Statement do look weak, but as I took a closer look at the rest of the financials I did see some rays of light. Hopefully they will come together to shine Kingsmen's way to glory come FY 2012 results in Feb 2013!

I will not repeat the positive points already brought up by RBM. Instead, here is my take of the positives:-

1) Although 3Q 2012 saw a drop in revenues by 18%, gross profit only fell by 11%; as a result the gross margin for 3Q 2012 improved to 23.2% from 3Q 2011's 21.5%. A rise in gross margin should always be viewed as a positive as it demonstrates the Company's pricing power, and 9M 2012 gross margin also improved slightly from 25.4% to 25.8%.

2) Share of results of associates was also very encouraging, as this contribution represents equity-accounted earnings from Kingsmen Nikko and Kingsmen Korea. Although on details were given, I'd assume an increased level of activity for Kingsmen's associates in these countries contributed to the higher earnings of $1 million for 9M 2012 as compared to just $376k for 9M 2011.

3) Looking over to the Balance Sheet, Trade Receivables fell quite substantially by about $16 million, and resulted in good cash inflow for Kingsmen, with cash and bank balances remaining at $48 million, near the record high of $49.3 million registered on June 30, 2012. Total loans also decreased by $600k from $5.2 million to $4.6 million.

4) The cash flow for 3Q 2012 was not as strong as the first two quarters, registering an OCF of $2.36 million, but the +ve is that FCF was still recorded, with Kingsmen's business requiring very little capex (capex was just $313k for 3Q 2012), resulting in FCF of about $2 million. If we look at 9M 2012, total FCF stood at $23.7 million. Recall that for 6M 2012 FCF was $21.7 million, and Kingsmen usually has a strong 4Q which should see even more FCF coming in. Just to recap - 4Q 2011 FCF stood at just $822k, and total FCF for FY 2011 was $10 million, less than half of what 9M 2012 has already generated.

Note that the cash outflow from payment of interim dividend of 1.5 cents/share (on September 24, 2012) amounted to $2.875 million. Full-year dividend of 4 cents/share amounts to $7.66 million. By observing Kingsmen's strong FCF generation for FY 2012 of $23.7 million thus far, it would not be too far-fetched to assume that the Company might declare a special 0.5c/share dividend on top of its usual 2.5c/share final dividend, as this would cost the Company just an additional $1 million, bringing full year cash outflow for dividends to $8.66 million.

Well, now for the negatives; and I must say the negatives had me thinking about exactly how resilient Kingsmen's business is, and also how "lumpy" the earnings can be as, after all, their revenues are predominantly contract-based, even though 70% of their customers are repeat customers.

1) Interiors Division saw a significant drop in revenue for 3Q 2012, compared to 3Q 2011, of 30%. This makes me question the resilience of the Interiors Division to downturns, and whether the drop is due purely to timing differences (more roll-out programmes in 3Q 2011 as mentioned by Kingsmen) or if there is a fall in demand for Kingsmen's services year on year. The Company also states that "many of the larger projects were completed in 2Q 2012", which means most of the revenues were recognized in 2Q 2012. This makes me question how consistent the roll-out programs are for Kingsmen - are these confined to certain months or periods such as year-end holiday season? If so, then the timing of recognition of revenues would understandably be lumpy. I also note that no mention was made of fixtures export, which is supposed to constitute an increasingly significant portion of Kingsmen's business. It would be helpful if Management could shed some light on how this is performing, and whether there is a year on year improvement.

2) As mentioned by dydx, Kingsmen continues to hire aggressively in many countries, resulting in staff costs falling by only 6.2% in 3Q 2012 while gross profit fell by -11%. The rise in share of earnings from associates could not offset this impact, and it resulted in PBT being lower by almost 20%. Staff costs continue to be a bugbear for Kingsmen as the Company must pay handsomely for talent, even if the contracts may not be coming in. Training and development of staff and incentives to retain talent would also jack up staff costs, not to mention hiring more staff for their new thematic/scenic division which will undertake theme park projects.

3) Again back to Interiors Division, 9M 2012 saw a revenue drop of -10.8% year on year, and I am wondering if Kingsmen is able to grow this division further for FY 2012 and future years. Roll-out programs by existing clients do have limitations in terms of the areas these companies can expand to, and with the economic crisis raging on they would be more cautious in expanding. Unless Kingsmen can confidently clinch new contracts with new clients and proceed to roll out for them, I feel the revenues from this division would stagnate and hit a plateau, which is a big negative for shareholders. Unless Kingsmen provides more clarity on this division, I am apt to feel pessimistic about its future prospects.

Overall, I would still conclude that the positives outweigh the negatives, in terms of FCF generation, possibly lumpy earnings from Interiors and the higher order book of $289 million compared to 3Q 2011 of $254 million. I am unsure if this order book also includes contracts for their smaller R&D and AM divisions, but with the good growth momentum this year we should expect to see a better contribution to bottom line for FY 2012.

Do note, though, that R&D has much better margins than AM; a glance at FY 2011 segment report shows that R&D had a segment profit of $2.7 million on revenue of $8.5 million, for a segment margin of nearly 31.7%. Alternative marketing, on the other hand, generated just $101k of profits on revenues of $8.9 million; but I understand that for FY 2011 there was high depreciation on one of their flat-panel TV screens which resulted in profit being wiped out. Hopefully for FY 2012 the contribution from AM division would be more substantial, and pull up Group NPAT. (Note that no segmental breakdown has been given for 2012 so far in 1Q, 1H and 3Q announcements).

Just for the record, EPS for 9M 2012 was 5.61c/share; for 4Q 2011 the EPS was 8.56c - 5.41c = 3.15c/share. If we add 4Q 2011's EPS to 9M 2012, we will get a FY 2012 EPS of about 8.76c/share. Since order book for 9M 2012 is about 13.7% higher than 9M 2011, assume EPS is also 13.7% higher for 4Q 2012, which will yield a 4Q 2012 EPS of about 3.58c/share. Therefore, my projected EPS for FY 2012 is about 5.61 + 3.58 = 8.99c/share or about 9c/share. Taking the last done share price of 77c, this represents a PER of about 8.5x (which means Kingsmen is fairly valued, as market leader Pico FE also trades at about 8.5x to 9x PER). Dividend yield based on a 4c/share full-year dividend stands at 5.2%.

My 2-cents worth. Smile

(Vested)
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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Interesting to note AmFraser's Kingsmen analyst update of yesterday. Entitled "A Softer Quarter from Lumpy Recognition", this report seems to echo remarks made by yeokiwi, FFNow and dydx on Monday evening.

http://www.remisiers.org/cms_images/rese...121106.pdf

The concluding paragraph of the analyst report is, in particular, worth a read: Maintain BUY — FV of S$ 0.87. We remain positive on Kingsmen’s prospects, noting that it continues to have pipeline visibility in the form of store roll‐outs and themepark contracts over the next few years. The soft 3Q is more an issue of lumpy recognition, rather than a lack of demand for Kingsmen’s services. Taking into consideration a spillover of project recognition into 1QFY13, we lowered our estimates for 4QFY12. We are now expecting a full year EPS of 8.80 Sc, down 12.8% from previous estimates. Rolling over our estimates to FY13F, we now value Kingsmen at S$ 0.87, which is based on 8.5x FY13F EPS of 10.2 Sc. Despite a strong share price movement over the past months, Kingsmen still offers an attractive forward yield of 6.0%, offering a support for the current share price. BUY.

Although I share this analyst piece with VB forummers .......... personally speaking, I believe forummers will gain much more insight into Kingsmen's Q3 2012 results (and its prospects) by reading Musicwhiz's and dydx's postings of Monday evening, rather than this AmFraser report.

Vested
RBM, Retired Botanic MatSalleh
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There are altogether 3 update reports (all dated 6Nov12) issued by DMG & Partners, AmFraser, and Maybank Kim Eng from Kingsmen's website.....
http://kingsmen.listedcompany.com/research_reports.html
all reaffirming the weaker 3Q results is merely a blip.

Maybank Kim Eng has even revised their TP for Kingsmen upwards to $0.96 (from $0.85 previously)!
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(07-11-2012, 04:39 PM)dydx Wrote: Maybank Kim Eng has even revised their TP for Kingsmen upwards to $0.96 (from $0.85 previously)!

KE is, as usual, being over-aggressive and optimistic over their TP. Considering Pico FE, the market leader being about 3x the size of Kingsmen, is trading around 8x PER, I don't see why they should ascribe an arbitrary 9.7x just to jack up their TP. The analysts from OSK DMG and AmFraser are at least more conservative in their projections with TP more or less similar to their previously released reports. The KE analyst also made an error stating that 2.05 cents final dividend will be paid, instead of it being 2.50 cents. THey also assume EPS of 9.8c for FY 2013, and by observing the Interiors Division stagnating and no announcements of any significant theme park contracts, I feel this is way too optimistic.

With the aim of these brokerages being to encourage more churn amongst investors, I'd say the move to "upgrade" their TP from 85c to 96c was a poorly-conceived one as there is no justification for the higher valuation and also the significantly higher EPS of 9.8c for FY 2013.
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I concur with Musicwhiz on the point that KE reports tent to be over-aggressive on TP. KE reports seem always match the pre-determined TP with valuation, rather than the other way round.

On top of that, KE reports tend to be more sloppy, with more error even on numbers.

IMO, credibility of KE reports are lower compare with others.
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While it appears Alison FOK the stock analyst in Maybank Kim Eng may have been a little more euthusiastic in her assessment on Kingsmen's stock value than the other 2 from DMG & Partners and AmFraser, we have to bear in mind that Kingsmen's business and footprint across Asia are both growing, which simply means that the intrinsic value of this well-organized, established, and run enterprise is poised to grow further with time.

If Ben Son and Simon Ong get lucky, a willing suitor with a prime background may just appear and offer them $1.00/share for their controlling stakes, and ask them to put in another 3 good years to put in place a next generation of 'buttress root' senior management team before the 2 go for their well-earned retirement. Of course, the resultant GO will be a boon for all minority shareholders. I may appear to be a little more euthusiastic here, but I don't think I am dreaming!
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