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.
SudhanP.com 