Kingsmen Creatives

[Musicwhiz]

For Kingsmen I did not go into too much analysis, so there's less chance of the so-called "Analysis Paralysis" which I am aware of falling into. A lot of the decision was based on gut feel and an appreciation of the qualitative aspects of the business - the numbers were there to bolster the case for me to make a purchase.

I would bellieve yield is the main reason for the pockets of substantial shareholders continuing to hold on, and there is also potential for growth in the business; though many many believe growth has peaked. I have my reasons for purchasing which I have yet to articulate on my blog in separate "analysis of purchase" sections like what I did for MTQ and GRP.

As for comparing TA wise and FA wise, I don't like to comment on such studies or tests as they may be skewed or the sample size not sufficiently large (or the time frame not sufficiently long) to pass conclusions.

For me, I will stick to my method of investing and tweak it along the way. But as of now, I still have no penchant for using TA or any form of charts/diagrams to make my investment decisions.

Thanks!

[Musicwhiz]

What I am about to post here is just a brief summary of my thoughts on Kingsmen's FY 2009 results based on a cursory glance at the financials. A more detailed analysis will be posted on my blog in due course (along with my Analysis of Purchase):-

1) FY 2009 revenues had increased 27%, but gross profit only increased by 1.7%. This was mainly due to gross margins falling from 30.7% to 24.6%, as a result of the higher value but lower margin Universal Studios Contract which was awarded to Kingsmen. If we look to 9M 2009, revenue was S$151.6 million, and gross profit was S$40 million. This would mean 4Q 2009 generated sales of S$90.4 million, with gross profit of S$19.5 million, which indicates that 4Q 2009's gross margin was just 21.5%. This quarter saw a lot of recognition of the Universal Studios Project, and so was responsible for dragging down the overall gross margin for the Financial Year.

2) Notwithstanding the fact that gross margins had weakened, net profit attributable to shareholders actually increased by 5.1%. If you compare it to the 1.7% increase in gross profit, this shows better expense control. Indeed, staff salaries and expenses increased by just 9.4% compared to the 27% increase in revenues, and other expenses and depreciation actually decreased.

3) Net profit margin was 6.2% against 7.5% a year ago, and this was mainly impacted by the weaker margins from Universal Studios, it being a large component of revenues for FY 2009. However, I checked Pico Far East's Interim Report for 6 Months ended April 30, 2009 (they have an October 2009 year-end); and their net margin was only 5.76%. We are talking about the Market Leader in the industry and Pico are at least 3 times larger than Kingsmen; yet their net margins are lower than Kingsmen. So by doing such a comparison, Kingsmen margins would seem respectable.

4) ROE may have dipped to 28%, but granted we are looking at an increasing equity base every year (the denominator is increasing) and it gets progressively harder to increase earnings by the same % to maintain high ROE. As mentioned, FY 2009 was impacted by lower margins so the increase in net profit was not enough to offset the increase in equity base; hence the drop in ROE. By itself, 28% is still a very respectable ROE and please remember that Kingsmen is in a Net Cash position; thus the ROE does not stem from debt at all.

5) I believe the reason for Kingsmen clinching the Universal Studios Contract was not because they were facing intense competition and had to under-bid below the market norms; but if you read more carefully into the press release and associated MD&A, their experience in successfully completing Universal Studios opens the doors to Thematic and Scenic Works which is a new business division and potential future revenue stream. With this knowledge, they can now bid for theme park projects in South-East Asia, of which a few are coming up. Hence, I see this move as a catalyst for them to garner contracts in future, and to expand their capabilities, competencies and knowledge base for the long-term. The temporary dip in gross margins will be compensated by the long-term benefits of taking up this contract.

6) Moving over to the Balance Sheet, it does appear that Trade Receivables jumped by a lot from S$41 million to S$75.7 million (an 85% increase). This is against just a 27% increase in revenues. However, Note (f) in the Financials mentions that a proportion of the Receivables relates to unbilled revenues; meaning work was completed, revenue was already recognized (based on accounting concept of % of completion), but the invoices were not billed as at year-end and no cash has been collected yet. Therefore, I conclude this is a timing difference. The associated cash flow impact can be seen as a -ve S$35.2 million cash outflow in the Cash Flow Statement.

7) Loans and borrowings remained low at about S$1.3 million against a cash reserve of S$22.8 million, and the Group is in a net cash position of about S$21.5 million. The business has generated decent returns without significant gearing and without the need for huge amounts of working capital.

8) In the Cash Flow Statement, if we take into account the fact that the collection from Universal was a timing difference, then operating cash inflows should higher than the stated S$1.4 million, and FCF should be present as per FY 2008. The fact that the Group is proposing a 2-cent per share dividend, up 33% from last year's 1.5 cent per share, shows that there is little risk of the trade receivable being uncollectible; and hence not much need for any provision for doubtful debts which may further impact the Income Statement.

9) Their order book is expected to grow slowly but steadily, and the recovering economy and soon to open Las Vegas Sands will bring more opportunities for the Company to clinch contracts. Kingsmen has enough clout and reputation to command decent gross margins even though competition is present from Cityneon, Pico Far East and Design Studio (for fitting out). The Company has been around for 34 years and thus its reputation alone plus its high quality is an intangible asset which would help it clinch more deals.

10) With the prime Orchard Belt undergoing further upgrades amid a plan to revitalise the shopping centres there, there will be more opportunities for Kingsmen to do Fitting Out work; while their expansion in India, China and Middle East are steadily gaining traction and should show +ve results in 2-3 years.

Just my 2-cents.

[kennynah]

u champion.... for all these hard work...sure hope you are having ball analysing the details...

if i were to do this task....soon i will need to visit the doctor.... headache and migraines...

[tonylim]

Musicwhiz,

Must admit you are one of the best whom I found in cyberspace.
Many thanks for your professionalism.
FYI , I join you in MTQ after reading your Blog.

Cheers.

[Musicwhiz]

Thank you for the encouragement guys! I really appreciate it as I don't always get +ve comments from people.

Anyhow, I will strive to improve my analysis and delve more into all aspects of a Company. There's no room for feeling complacent - it's a never-ending learning journey after all.

Cheers!

[millionairemind]

Thank you for the encouragement guys! I really appreciate it as I don't always get +ve comments from people.

MW - Keep up the good work. I am surprised that you mentioned you don't always get +ve comments for the good work that you do

[Musicwhiz]

Thank you MM!

Well I noticed two factions so far:-

1) Those who think I am trying to defend my investment decision (as in I skew my argument in favour of why I bought in the first place, regardless of how the Company perfoms),

2) Those who think the analysis is flawed

For (1), I admit the endowment effect does make me less objective in my appraisal and analysis; but then again how can one be totally and 100% objective even if one is not vested? We are humans after all.

For (2), I would challenge the other party to come up with their own set of arguments so that a lively discussion can take place. This has so far happened for Ezra and Tat Hong, of which I had to admit I made mistakes for the former and I missed out some considerations for the latter.

[Aspellian]

Hi MW,

appreciate you articulating your analysis and thoughts and sharing with us. It takes efforts and courage to do that. cos you need to defend your initial assessment but you have always been humble to accept alternative views, which is not an easy thing to overcome.

Cheers!

My only concern of Kingsmen is its liquidity - but if its biz is doing fine, share price going up, giving out dividends than one day share price will be re-rated. Look at ARA.

You can also consider looking at Challenger (IT retailing), you may like it (but its different when analysing retail stores)

PS: I not vested in any of above counters.

[Blackjack]

Hi Musicwhiz,

Still the same thing that i've said before, admire your tireless research and selfless sharing, so if i sound as though i am questioning your views its merely for academic sake k?
I guess one thing i still cant convince myself about is Kingsmen apparent low margin. Isn't this kind of service biz supposed to generate higher margins? It does seem from this latest results that they are trying to pump up the revenue with scant regard on the profitability. The comparison with pico seems reasonable, but to me I just interpret it as heavy throat cutting in this low barrier business.

[Musicwhiz]

Hi Musicwhiz,

Still the same thing that i've said before, admire your tireless research and selfless sharing, so if i sound as though i am questioning your views its merely for academic sake k?
I guess one thing i still cant convince myself about is Kingsmen apparent low margin. Isn't this kind of service biz supposed to generate higher margins? It does seem from this latest results that they are trying to pump up the revenue with scant regard on the profitability. The comparison with pico seems reasonable, but to me I just interpret it as heavy throat cutting in this low barrier business.

Hi!

Well, for this industry it's a volume game and scale which makes a Company more well-regarded; and their ability to take on large scale projects attests to that ability. The main costs are manpower costs and sub-contractor costs, and these tend to be higher when they tackle more complex projects like Universal Studios.

I agree with you on the low margins, that is a -ve for the business and industry. But the +ve side is the business is a service one and thus needs very little working capital to function effectively, and also does not need gearing (debts).

It will take time to see whether the Company can raise the bar for themselves and garnet more high profile contracts and more business from major brand names for fitting out. I base my investment decision on a lot of intangibles (i.e. more than the numbers and net margins).

Stay tuned and stick with me to find out