This will be an update to my latest additions as I accumulated more Kingsmen shares at a price of $0.61 for 23,000 shares. This is now my 3rd largest holding in my portfolio.
The basic thesis to the company remains much similar to what I have previously written (Link here and here) so I will not repeat much of it. Obviously, my first entry to the company was near to the peak so it’s a really bad call and a lesson learnt to always consider for margin of safety – regardless of how much confidence you have in the business (point noted!!!). Since then, I have averaged down a few times as I remain confident in the business and management of the company.
During these periods, I’ve also received plenty of updates from a prominent blogger who is vested in the company. I don’t want to take any credits from the work he’s done so out of respect I will not mention any of the details here. But all credits to him, I definitely had a greater understanding of the business and their customer segmentation and how the management run the company for the past few years.
With FY15 results finally concluded, let’s first take a dive into their recent performance.
Revenue and Gross Profit Margin remains largely competitive compared to previous year as we’ve seen a much improved growth (26.3% yoy) from the “Exhibitions & Museums” segment offset by the drop (-26.0% yoy) in their “Retail & Corporate Interior” segment. “Research & Design” also managed to grow double digit while this is again offset by the drop in “Alternative Marketing” but the latter two contributions is small for now.
Net profits came in higher at $19.1m for the year, which includes the $5.9m divestment of associate and financial assets. The recurring profits, without the one-off items, would come in at $13.1m, which translates into a 26% decrease year on year and explains why the shares is where it is today. This translates to a net margin of 4%, which is a new record low in the past 10 years.
Cash flow from operations after changes in working capital is at $12.8m, while the company has spent a considerable amount of capital expenditure this year – both in the acquisition of land rights for their new HQ and a factory in Malaysia. Hence, free cash flow for this year is negative as compared to the previous couple of years where fcf generation is strong.
In terms of current valuation, earnings yield based on current price is at 10.8%, a comparable representative for the past couple of years, which seems to indicate that the poor performance has been factored in the weakening of the share price.
Dividends are cut to 3 cents/share for this year, which still indicates a decent 4.8% yield at this point.
The “Exhibitions & Museums” segment remain the main contribution to the company’s topline and they have continued to grow strongly this year by outperforming the previous year with a 26.3% growth. Management cited in the outlook that these segments will continue to do well as they have a few projects tendered and secured so it is likely that we will see a continue momentum upward growth in this segment.
However, the management conceded that the “Retail & Corporate Interior” segment will be tough in this challenging environment as the company faces a double whammy of slowing economy and a generation shift in the definition of luxuries as the industry evolves. Whilst the slowing economy is cyclical and not structural in nature, the latter factor could shape the direction of how the company will move towards the new luxuries definition of age. With a brand establishment since 1976 and a team with vast experience, I think the company should be able to evolve with the needs of the industry.
The company's overhead costs continued to provide pressure for the company's bottomline as depreciation costs increase due to the acquisition of the new factory in Malaysia while salary related also increase due to higher headcount required for new projects tendered, though remuneration was mostly controlled by tying them to company's performance.
With net margin coming in at the lower half of the spectrum, the only way for the company to improve is either to decrease their overheads or increase their topline. OVH / GP is something which I will be watching very closely as the quarter progresses.
In 2015, the company has also made an acquisition for land rights for their new HQ located at Changi Business Park. Construction is under way and once they are ready, we will be able to see a cost saving under the operating leasehold expenses which is currently at $3.8m/year. This currently contributes to 5% of the overall overhead costs in their book.
From a valuation perspective, I happened to notice something which is interesting.
We know that most service provider companies like Kingsmen and Vicom would be best measured by discounted earnings or cash flow valuation method because they do what they do best and their services are considered “premium assets”.
Now if we think about most service provider companies, take for instance Vicom - it makes sense for them to trade at a premium to their book value because investors are not paying for the assets in their book but a premium for the services in this case.
But what if you could get a service provider company that is currently trading near the book value, with most of their assets that are either cash, receivable and productive in nature, and you are still able to get their niche services that they are rendering for future projects for free?
A quick look at Kingsmen’s full year statement shows that their NAV is at 56.5 cents and to dissect the balance sheet, most of the composition of their assets include cash, land, buildings, investments and Trade Receivables. We have not even talked about paying for a brand that is worth so much reputable in the industry all these years.
I think that's definitely one angle you can look at.
The other way to look at it is to use the DCF methodology model I've created below and I've put in some reasonable assumption.
- Net Income Growth - 2015 was a bad year and the last time they've been in this situation was during 2007 when they reported lower. Hence, I've made the assumption of 10% growth for the next 5 years. I know it sounds rather ambitious in this sort of environment but as a company I think that's a valid growth rate that they should be looking to bounce back.
- FCF Growth - FCF growth is expected to grow at 7.3% every year again mostly because of the expectation of the net profit growth. Depreciation, Working Capital and Capital Expenditure are all mostly based on actual at present.
- EBITDA Multiple - I think 10x is a fair multiple to value Kingsmen as they've been trading at this range for a long time now.
- WACC - Again, the rate to use here for WACC I have put them at 10% (+- 1% for sensitivity).
If I am expecting my investment to turn out well for this one, I'll have to expect them to bounce back and grow at a reasonable level in the future. It can be next year or it can be the following year. For as long as bottomline improves over time, the valuation model will show that this company is worth a look just based simply on their services they render alone.
Of course, to mitigate the downside, their NAV is at least worth 56 cents right now (take a look at my explanation above) so from a liquidation value point of view, I know that it should be highly unlikely that it will trade below their NAV, though crap things can happen when you least expect it.
Please do your own diligence and take my words with a pinch of salt, always.
Vested with 80,000 shares as of writing.