July 2010 – SudhanP.com

Kingsmen Creatives Analysis

I purchased Kingsmen Creatives on 18th May 2010. This post is long overdue as I planned to get this post out a week after purchase. I will touch on the quantitative and the qualitative part of this business in this post.

What?

Kingsmen Creatives is a leading provider of integrated marketing solutions. It specializes in Exhibitions & Events, Museums, Retail & Commercial Interiors and Integrated Marketing Communications. It has 17 offices in many parts of the world, including Asia and the Middle East. It provides customers with a one-stop shop solution for all its needs.

Does Kingsmen have a wide moat?

Moat wise, I would not say Kingsmen has a huge moat but I believe it is large enough to protect itself from its competitors. Kingsmen has recently done huge and high-quality projects like Universal Studios Singapore (USS), Orchard Road revamp, Youth Olympic Games, F1, Shanghai World Expo and many others. As Kingsmen provides a one-stop shop solution, many clients would prefer to engage Kingsmen to get its job done.

Having said that, I feel Kingsmen is in a price-competitive industry that has a low barrier to entry. However, for the high quality provided by Kingsmen, a premium is demanded and I’m sure customers will be willing to pay a bit more for the quality and experience which is paramount in this industry. To see the quality of its works, one can always visit the fit-outs that Kingsmen has completed like the USS.

70% of Kingsmen’s customers are repeat customers. This provides an edge to Kingsmen. When a customer engages different companies to do its fit-out, the cost for the customer actually rises and economies of scale is not enjoyed, bring down the costs. Thus, customers would rather stick to a company that can do all of the job required. This brings down the expenditure for Kingsmen as they would not need to incur advertising costs to win a new customer. It’s a win-win situation.

Kingsmen has won numerous awards including Service Partner Excellence Award given by Singapore Tourism Board in 2008.

Keeping in mind that Kingsmen’s moat is not that huge as stated above, I was extremely conservative with my intrinsic value calculations and used 0% cashflow growth rate just in case. Even with using 0% cashflow growth rate, the company was very much undervalued.

Quantitative analysis

Revenue, Net Profits and Margins

Kingsmen’s revenue has been increasing consistently from 2003 to 2009. Its gross profit only increased marginally from 2008 to 2009 mainly due to the USS project taken up. It gave thinner gross profit margins due to higher costs of sales of goods. Thus, its gross profit margin dropped to 24.6%, around 6% decrease from previous year. FY2009 net profit was marginally higher than the FY2008 net profits.

Debt and cash in hand

Kingsmen has extremely low debt at $276,000 and lots of cash at around $23 million.

Ratios

Its current ratio is at 1.4. ROE and ROA are above the required percentages. They came down from the previous year due to a slower increase in net profits compared to its increase in equity.

Equity

Equity has been increasing consistently and its growth rate is high as well.

Cashflow

Cashflow from operations wise, it dropped quite a bit from the previous year. This was mainly due to the timing difference in getting their payments from the USS project. If you look at the balance sheet, trade receivables went up quite a bit from the previous year. This corresponds with the decrease in cashflow. Average free cashflow is negative for FY2009 as I took average CAPEX. If 2009 CAPEX was used, there would still be free cashflow for 2009. I’m confident that for FY2010, the cashflow figures would be almost on par with FY2008 figures. So far, the latest quarter report has been positive.

Others

Kingsmen’s dividend yield is around 6% and I consider it very good for a company like Kingsmen which is very project-based.

Qualitative analysis

Competitors

Competitors wise, Kingsmen has 2 nearest competitors in the form of Pico and Cityneon. Pico is very well-established in this industry. However, when comparing its ROE, it’s much lower than Kingsmen’s over the years. Cityneon’s ROE is also much lower than Kingsmen’s. Cityneon also has higher CAPEX and negative cashflow in FY2008.

For a major project, it is usual to see more than one company engaged to complete the project. For example, the USS project had both Pico and Kingsmen on board.

Since Kingsmen is perceived to be No.2 in this industry, it has more room for improvement and overtake Pico. Staying on top for long might breed complacency. With its expertise and good management, I’m sure Kingsmen has plans to do very well in this industry and thwart its competitors.

Insider buying and Share buybacks

Share buybacks was undertaken by the company in 2008. Both Benedict Soh, executive chairman and Simon Ong, managing director own 24.59% of the company each. This promotes management decisions to be inline with shareholders’ interests.

Future growth avenues

The MICE industry in Singapore is opening up with the Integrated Resorts recently unveiled to the public. There will be room for more growth in this area. MICE contributed to 30% of Singapore’s tourism receipts last year and I’m sure this will pick up. I’m sure Kingsmen is poised to capitalize in this industry. The China and Middle East market is also opening up for Kingsmen. Kingsmen is looking to expand its sports marketing and event management services of the company. It also has potential contracts to be won for Phase 2 of USS and other theme parks planned in Dubai, South Korea and Shanghai. All the projects are purportedly worth around $22 billion and the projects will last till 2014.

DBS Vickers Online Cash Upfront

Purchasing a stock in the Singapore market costs at least around $27 (depending on the lots bought and price bought at) as commission. Many brokers charge this fee. However, brokers like DBS Vickers, have another service on top of their normal trading service. It’s called the “Cash Upfront” service. When you buy through the normal trading service, DBS charges the around $27 at the least which is the norm. But, when you trade through the cash upfront service, you only have to pay around $19 at the least.

Why the lower commission? By using the cash upfront service, there is lesser risk for DBS as clients pay immediately (deducted from the cash upfront balance) once they purchase their stock (when prices are filled). So, the T+3 days settlement period is not needed, thus lessening the risk for DBS. You can choose to transfer a lump sum into this cash upfront account or transfer the money only when needed to pay for a particular purchase. Cash upfront account opening and cash transfer can be done through DBS Internet Banking service, provided you are a DBS Vickers client.

P.S. I’m not an employee in DBS and this is not a promotion for their services. I just felt that this would be beneficial to readers who want to enjoy lower commissions from their stock purchases as not many know about this service.

Value investing dogma

I finished re-reading a book called “F Wall Street” last week. It is a very interesting book with an even more interesting title. It teaches readers why not to trust stock brokers, how to invest in strong companies and why is cash the most important thing for a company to grow. I want to quote a few rules I came across in the book that would be useful for value investors. Here goes:

If intelligent investing were a religion, these would be its commandments:

Never invest in anything you don’t understand.
Price follows value over the long-term. (Reminds me of my post on “Myopic Investors”)
Price volatility does not imply any additional or reduced risk; risk is the price you pay and your evaluation of the opportunity. (Also, remember price alone determines your ROI)
The stock market is a place to buy and sell businesses (yes, businesses), regardless of myriad of other (or faster) ways to make or lose money in stocks. (You are actually a business owner when you buy a stock, so think like a business owner and think what will increase your business’s value in the long-term)
There is no tomorrow, only “five years from now”.
Earnings are for the accountants; business owners rely on cash.
A great business is one that will survive the bad times, so wait for the bad times to invest in great businesses. (Think recession. It’s the best time to scoop up businesses at rock-bottom prices. It’s like an incredibly crazy sale that will only come once every few years!)
Unless a piece of news affects the business and it’s filed with SGX or SEC (for US companies), treat it as noise. Analyst opinions and general market trends do not affect the business of your company and are not filed with SGX or SEC.
If you don’t have a margin of safety, you don’t have a good opportunity. Wait till the price is right.
It pays to be patient. Practice “assiduity” (sitting on your ass and doing nothing) till the opportunity arrives.

Benefits of blogging

It has been almost 2 months since I started this blog and I have been getting good reviews from my readers and friends. Thank you to all for reading my posts and keeping up-to-date with my blog. My utmost priority is to create value to my readers.

My blog has also benefited me so far. These are the benefits that I have received out of blogging so far:

Makes me accountable to myself and my investments
Promotes critical thinking
Enables me to learn from the questions my readers ask me through the comments section. This shortens my learning curve as well. So, do keep the questions coming!
Ability to keep track of my investing journey and progress to find out what mistakes I have made to learn from them and what correct things I’ve done that can continue
Enables me to post on the knowledge that I’ve amassed throughout the years through books, etc and to share my experiences and knowledge with you. It will enable me to refresh my memory when I read them maybe a year from now.
Forces me to read up more books to improve my investing knowledge and to provide quality blog updates. Knowledge is something no one can take away from you. Knowledge is empowering.
Helps me to keep in touch with my English and to improve it further. It has been almost 4 years since I last sat for an English exam. And 2 years of NS didn’t help to improve my English at all (I felt my England got worst after entering NS actually due to massive use of Singlish and broken English. Haha!)

Do look forward for more enriching and refreshing posts!

Myopic “investors”

I felt a strong nudge to write a post on how most “investors” only look at the short-term without regards to the fundamentals of the company. Many don’t feel that behind every counter and price, there’s an underlying business. I first felt this nudge when I went for a stock market outlook seminar by DBS Vickers talk in early July. Next, this same nudge came back when my NS friends and I were chatting on Facebook about British Petroleum (BP) yesterday, so I couldn’t control my urge to blog on it.

Benjamin Graham once said that in the short-term, the stock market is a voting machine but in the long-term, the stock market is a weighing machine. What this means is that in the short-term, the stock market is akin to a gambling den. In the long-term, the good companies will see their stock prices grow in tandem value growth. I’ve only read these kind of theories in books previously. After having learnt about investing and having started investing just recently, I am beginning to experience all these first-hand. Some of the fundamentally strong stocks that were grossly undervalued due to the financial crisis last year are picking up consistently now, even though they fluctuated up and down due to the traders in the market during that time. Some of the penny stocks that were far from being fundamentally strong in terms of cashflow and balance sheet, went up during the speculation period when people were talking about the green shoots. But, now their prices are back to their lows seen prior to the crisis. This clearly shows that the market is myopic in the short-term. There will be another example (about BP) quoted below.

During the DBS Vickers stock market outlook seminar in early July, I came across “investors” looking to make quick bucks from the market by asking for stock tips from the brokers. Also, during the talk where an analyst gave her views on the dark horses (undervalued stocks), people were fervently taking down the various stock names and stock target prices quoted by the analyst. Hopefully, they do their own thorough homework before ploughing money into the stocks recommended. Remember, your investing style and criteria will be different from the analyst’s.

This brings me to the interesting Facebook wall chat that my 3 NS friends and I had yesterday. We started talking about BP after the same friends read my previous post in this blog regarding dividends. Below, I have posted the screenshots of the FB chat that went on (names have been removed to protect privacy). Please take a look at the screenshot to understand what happened.

Screenshot 1:

Screenshot 2 (continuation):

Interesting debate, wasn’t it?

One of the reasons for the myopic view among people is that we are trained by society to want results fast. That’s the reason why “get-rich-quick” schemes are so rampant. We would all have heard the tale on the hare and the tortoise when we were young. We learnt that the slow and steady wins the race. This is a perfect story that can be used in the stock market. The fast and the furious get killed in the market, while the slow and steady get rewarded provided they know what they are doing.

Unless you are a professional trader who has studied the market for years and years, I strongly feel one should not enter the markets out of hearsay, rumours and insider tips to profit in the short-term. Insider tips will no longer be insider tips once it reaches your ears, unless the CEO is your father or something. Even then, you have to have due diligence.

To really experience what I have just blabbered about, you can go to Google Finance and look at how different news moves a company’s stock price. One good example I saw yesterday was BP’s (ticker symbol: BP) as quoted on top. The US markets open at 9.30pm SG time in case you really want to monitor the market.

Thus, one should always invest in the market and not gamble in them. By investing I mean really digging up the annual reports of the companies concerned and analysing the company thoroughly by looking at the income statement, balance sheet, cashflow statements, chairman statement, etc. Also, look at latest company announcements and read news critically and think how the news will affect the company’s profitability in the long-term.