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Thursday, July 2, 2015

Recent Action - Kingsmen Creative

This week, I made a purchase of 15,000 shares of Kingsmen Creative at a price of $0.98.

After recently adding Silverlake into the portfolio (Link Here), I am delighted to add another company that fits into my criteria of strong business moats, high free cash flow generating capability, strong Return on Equity figures, and a superb strength of the balance sheet. More on those will be explained in a short while. This adds into the collection of similar companies I had in my portfolio that fits into the same criteria such as CMPH, Vicom, Silverlake, Nam Lee Metals, etc.

This analysis and decision was made after talking to a fellow blogger and good friend on the qualitative and quantitative nature of it's business, including how they operate as a business and how the market perceived to value these sort of industries.

If you have been following the recent Sea Games which was held in Singapore, Kingsmen should not be a foreign company to you. The company has been bidding some of the world's most important event in recent years and their niche industries allowed them to be awarded to become one of the leading sponsors of the games.


Business Overview

Kingsmen Creative is one of the leading service contractor that specializes in many prominent events in Singapore and the rest of Asia, including conceptualizing the interior behind many of the high end fashion brand names such as Chanel and H&M, events and exhibitions such as the Formula 1 and theme parks such as the Universal and Disneyland in Shanghai. Their main core business and operations are in:


  • Research and Design
  • Retail and Corporate Interiors
  • Exhibitions and Events
  • Thematic and Museums
  • Alternative Marketing





Financials Overview

I come from a profession that deals with financials all the time, so I'm a pretty sucker for financial numbers that look great to impress me. Since I am pretty sensitive to numbers, I usually bide around my analysis using a bottom up approach from the company's financial figures.

I have tabulated a summary table for the company's financial figures for the past 8 years (from 2007 to present) and included some of the most important financial metrics I usually require to analyse.


Kingsmen's Financials - 2007 to 2015

The company has been generating very good and steady increase of topline figures across the years, with increasing revenue while maintaining a respectable margin since the past 8 years and more. This is important because this shows how the company deals with external events such as competition entrance into the market share which could eat into their margins if they are not being competitive.

Their bottomline profit margin tends to stay across the 6% margin across the years and as you will see later, it is important that they maintain a steady growth of their topline while keeping cost competitive in check if they want to grow their earnings. Failure to do so will be detrimental to their growth as we've recently seen in companies such as Japan Food Holdings, who are struggling to keep afloat their high headcount costs which eats into the profit margin.

The Return on Equity (ROE) is an important metrics that I usually keep an eye on. Over the years, they have been generating a respectable ROE in the range of 23% while maintaining their financial leverage low. In some of my previous analysis on other companies, I usually like to break the ROE down into 3 financial levers to check the efficiency of the figures, namely Profitability, Operating Efficiency and Financial Leverage. I'll skip this exercise for this analysis in view that I had their margins and financial leverage checklist in place. The company has had some cash hoarding and accumulating for a number of years now, which typically strengthen their balance sheet but drags down the ROE of the company. In this sense, this is very similar to what Vicom is currently doing.

The company business model is built upon such that they operate in an asset light environment, with talent resource an important asset metrics to the company. The company has a low capex requirement in this case, which means that the company is capable of generating a high free cash flow ability as long as their topline and bottomline is increasing. If we take a look at the historical P/FCF as reference, they have been hovering in the range of 8x (with exception to 2009) for the past couple of years, and this is attractive in my view. Not many companies are able to generate such consistent FCF for a number of years in today's environment.

The company has been generating their earnings yield (opposite to the P/E metrics) consistently for a number of years at an average of about 11% now, distributing about half of them as dividends to the shareholders while retaining the rest to grow the company. This is important for investors seeking a dividend growth company because you want your company to grow, and also ultimately your dividends. The company is able to operate in a distribution business model like Reits by distributing out all its earnings as dividends at 10%, but it wouldn't make sense for them to do so. This is a company that has ambition to grow and investors would need to be patient to grow together with them.


Risks

As with all companies, risks are pertinent when it comes to dealing with permanent loss of income, which will ultimately impact the bottomline and shareholder's profitability. In my view, the main risks for Kingsmen would come from these factors:


  • Rising Headcount Costs
As mentioned earlier, talent retention is the main asset for Kingsmen and with rising manpower cost evident in today's environment, the company may struggle to keep afloat their costs in check. Their bottomline margin is coming in at around 6%, so they would need to find ways to increase their topline figures in order to tide the wave of a rising cost environment.

  • Slowdown in global activities
The amount of pies across the various global activities has to somewhat increase for this to make sense, otherwise it'll be a case of fighting for the equal number of pies amongst the rising number of competitors. I was highlighted by my friend that this is a niche industry with a high barriers of entry and high switching costs by customers, so customer retention and loyalty play a somewhat important role for that to happen. The opposite case goes the same when Kingsmen is trying to gain more market share from its competitors and they are facing the same barriers as their competitors.


Valuations

I am using a Discounted Cash Flow (DCF) for valuing the company due to it's predictability and consistency of it's FCF generating capability.

I am setting my criteria by using an unlevered FCF for the next 5 years starting from 2014, growing them at a terminal growth rate of 3% based on the profit figures, discounting them using a Weighted Average Cost of Capital (WACC) of 10% and using a Terminal EBITDA multiple of 10x, which is the average normalized multiple for the past 8 years. 

Sensitivity analysis of standard deviation +1 and -1 has been added for further reference and analysis.

Assumptions:

  • WACC = 10%
  • Terminal Growth Rate = 3%
  • EBITDA Multiple = 10x
  • EV/EBITDA = 9.3x
Based on the above assumptions, the intrinsic value came up to be at $1.25.




Assuming we are taking in some margin of safety discounts to our initial assumptions, we now get an intrinsic value of $1.00.


Based on the Gordon Perpetuity Model of using a terminal perpetuity growth rate of 3%, we now get an intrinsic value of $1.70, which presents a 70% upside and comes in line for long term investors who are willing to hold this for the long term.


Gordon Perpetuity Model


Conclusion

The share price has increased about 10% since I started monitoring them a couple of years back when the share price was less than $0.90. I still think it presents value at this price and management has proven their capability time and again that they are able to withstand challenges in the midst of uncertain global environment. Balance sheet has also strengthen quite remarkably since a couple of years back.

This should be a good company to own if you are thinking of holding them for the long term. I think you should not expect any fireworks you've seen in other companies but instil a steel of patience to grow together with the company. As for myself, I'm really excited to be able to add on companies with strong moat into the portfolio.

I'll be updating my portfolio with the latest update shortly with this purchase.

What do you think of this company? Will you decide to invest your hard earned money in this sort of company?


17 comments:

  1. I am also vested in Kingsmen since year 2014 and have liked how "boring" this company is (i.e. consistent annual 4 cents dividend, good cash position, current ratio). Your analysis for kingsmen creative aligns with my own analysis when I bought them too at slightly below 90 cents.

    Another company similar to Kingsmen Creatives but operating at a smaller scale is Cityneon (listed in SGX too) and PICO will be bigger than Kingsmen but not listed in SGX.

    ReplyDelete
    Replies
    1. Hi tbz

      Good to know fellow shareholders for Kingsmen :) I've been eyeing this counter for very long but didn't manage to pull the trigger back then.

      Let's see how they unveiled in the next few years to come :)

      Delete
    2. Welcome on board! I have attended their AGM last year and found the management to be direct and really business focused.

      It is good that you have entered too and Kingsmen Creatives should be doing well based on their customer profiles and upcoming projects =)

      Delete
    3. Thanks tbz.

      Hope to see you in the upcoming AGM and beyond.

      Delete
  2. Bro, any view on SCI?

    now hit to a low of 3.9 already... I previously sold at 4.38 and now its down over 10% so I planning to buy it back

    I remember u sold way higher.. like 4.8 or 4.6

    ReplyDelete
    Replies
    1. Hi Felix

      Sorry for the late reply.

      I had replied you in the previous thread regarding SCI.

      Delete
  3. Hi B
    Great writeup and very succint analysis. I was having a look at this company too for a while. Wasnt too sure yet about their business previously but its apparent that they have a good management running the business. Just wondering, which part of the business intrigues you the most?

    ReplyDelete
    Replies
    1. Hi Paul

      Thanks for your comment.

      I'd have to say that the exhibitions segment are the most exciting because you can see from the projects they manage to secure that these are world class events that they are bidding and winning. The more they win these sorts of projects, the more they are going to bring up the profile of the company. I don't know if these projects are being tendered by many competitors profile that will bring down everyone's margin at the end of the day, but it is important the Kingsmen do it well when secured.

      Delete
  4. Great analysis!
    Impressive and consistent ROE and FCF.
    is the legal case in China settled?
    if not, maybe it should be included as a risk? PGL

    ReplyDelete
    Replies
    1. Hi PGL

      Thanks for your comment.

      Regarding the China case, I think the proceeding is already out and Kingsmen are being ordered to pay and provision for the case has been made. So I think the case is in order and closed now.

      Delete
  5. Hi B,

    Nice company! Their financials seem really solid.

    I never bothered to look at them before because I always thought that events is an overcrowded industry.

    Any idea how they can execute so well?

    ReplyDelete
  6. Hello B,

    A great write and reader friendly!

    I have been looking into this business as well and have no doubt this is a great business to invest in.

    However, I noticed that there is quite high capex, and in the most recent quarter, there is quite substantial drawdown of loan compared to the same time last year.

    Any idea why this might be so?

    ReplyDelete
  7. I can help to answer a bit. Kingsmen is one of the bigger players in Singapore for events industry and the services it offers can be found at http://www.kingsmen-int.com/services/ which corporate/retail designs & exhibitions/events are the revenue generating businesses.

    One exhibit done by Kingsmen Creatives which we may see in Changi Airport is the Enchanted Garden. Another upcoming attraction in Sentosa (KidZania Singapore) is also done by Kingsmen. Order book is quite healthy from last year's AGM which we got to know the next few projects for Kingsmen.

    ReplyDelete
  8. any idea why they incurred a capex of 15 million in Q1 of this year ? that's a pretty big jump in capex

    ReplyDelete
  9. WACC of 10% is very high considering their debt is serviced at <4% and cost of equity based on CAPM is also around 4%

    ReplyDelete
  10. Hi, Chanced upon your blog when researching on this company. Great analysis!! Thank you for sharing.
    Just wish point out that it seems that Kingsmen's talent retention came at a huge cost.. based on AR 2015, the employee wages came at 56 mil, which is 4.8% higher than in FY2014..at the same time, FCF dropped to negative..The capex is worrying in my opinion..

    ReplyDelete

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