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Tuesday, February 21, 2017

Recent Action - Kingsmen & FY16 Results Review

Kingsmen announced their full year results late yesterday night which was anticipated to be bad.

In my Q3 review, I anticipated their nopat to come in at $11 million by putting an assumption of 3.5% net margin based on the order book the company revealed. I was not far from that as the nopat comes in at $11.8 million with a net margin of 3.61%.

Here are some of the highlights which came to my attention:

  • Topline continued to remain solid as the company continued to win order books despite pressure from some of the division.
  • Gross Margin % continued to remain competitive and stable at 25.31%.
  • Exhibitions and Thematic division continues to see growth as they ventured out to Middle East and China. Retail and Corporate Interiors will be the key to watch out for in coming years.
  • The drop in profit of 38.4% year on year was mainly due to the one-off contribution last year from exceptional item of $5.9m. Excluding that, the profits would drop lesser at 9.3% year on year.
  • Net Margin continues to struggle as the company continued to incur higher operating expenses, mainly from depreciation charges and salary charges, which continued to increase at 3.2% as a result of increment wages.
  • Operating lease for the year is currently at $3.8m. The company acquired their new HQ for $35m ($29m + $7m land) and will be capitalizing their building at probably 30 years based on IFRS. That works out to be at about $1m per year. Costs will continue to come in between now to 2018 when the HQ is ready so more depreciation is expected.
  • FCF continued to be strong this year as they only had 3.5m capex. FCF per share is at 5.84 cents for the year.
  • Dividends were cut to 2.5 cents as a result of tough and tougher times to come and the company will be needing and conserving their cash for the building of their new HQ over the next financial year. This translates into a 3.9% yield based on current share price.
  • Balance sheet continues to strengthen as cash equivalent increases by $4m from previous year.
  • In terms of valuation, PER is not cheap at 10.7x and is the most expensive in the past 10 years. I suspect if we do a DCF valuation based on cashflow it might be better as the company is a strong cashflow generator.
  • Outlook - As at 31 Jan 2017, the company has secured contracts of $106m, lower as compared to $113m in previous year.

Recent Action

I made a decision to divest my 60,000 shares of Kingsmen at a share price of $0.63 this morning after much thoughts.

I'm taking a short term view on this but feels like the company has still much to do from both keeping their topline and margin competitive and also keeping up and tightening its operating expenses over the next 2 years at least.

If I take a look at how the company manages to go over $1 in 2013/2014, it is because they managed to close a net margin of close to 6% which gives them a PER of around 10x.

Unless the company can increase their topline significantly or keeping cost competitive by increasing their net margin at 6% (from current 3.5%), then it's hard to see how the valuation is able to price its share price upward.

I'll continue to keep a monitor on the progress each quarter and will attempt to get back in once the sky is clearer.


  1. Their growing business has a lower margin compared to their declining one. That worries me because I don't know how far much that will decline.

    1. Hi tech fan

      Good point there. I guess the management is protecting hard and maintaining their margin at this rate. But we'll only know when it happens. At this moment, I think the company do receive a fair amount of successful tenders given their reputation.

  2. I sold half my stake in kingsmen today, as I'm not sure whether to sell or hold. The reasons to hold is that this is asset light business n it may recover. The sell reason is that it's employee expenses is rising without rise in gross profits.

    1. Hi Thinknotleft

      I had the same dilemma when making my decisions to hold or sell. I guess i need to see better clarity on whats happening to make a better informed decision when it needed be, and there is always room to get back onto the boat.

  3. Dunno why you keep flip flop on Kingsmen. Buy sell buy sell. Rofl.

    1. Judging from your comment, i doubt you achieve anything decent in your life.

      Get a life. Grow up kid :)

    2. Hi B, another great post as usual! Thanks for the update. :)

    3. buy to sell...
      and sell, to buy again

      eat to shit,
      and shit, to eat again

    4. Think I rubbed a pain spot. Lucky I never bought any KMC. Lol.

    5. Thanks SGinvesting, FC and Blanc Fable :)

  4. Hi B, agree we should sell when fundamentals are impacted. That's the guts to cut loss and preserve capital although I am still holding Kingsmen Creative. Some risk as management has change to the new set of leaders and economy is currently on a downtrend. I am holding Long in hope for future value to be unlocked for Kingsmen.

    1. Hi SR

      I do have a few close friends who know the company and management deep enough and he remains confident about the company. I think it'll do just well under their management. I really do.hope to see the company going past this trough tough period.

  5. Good to sell and deploy to better investments

    1. Hi Anonymous

      Yeah there's a bit of that thinking on the opportunity costs as well when making decisions.

  6. Hi Brian, do agree Kingmen is facing strong headwind forward. However I'm still holding on as I do see strong corporate governance in place with proper succession plans executed. I believe overtime you can always buy back this business when things are clearer for them. (I only have less than 2% of my port in kingsmen so I may add to average in later) Cheers

    1. Hi Stormwhistle

      Totally agree with your thoughts there that under a competent management they can turn things around in their favor. I really like the management as well after talking to them a few times. I'll continue to monitor this and i hope they can prove me wrong, I'd be happy for them.

  7. Hi B,

    Benedict Soh has bought more shares at 63cts in the two days after you sold. It seems the Chairman feels the shares are undervalued.

    PS. I'm still holding on to my shares.