Saturday, September 15, 2018

Portfolio Construction & Management


Taking a break from the Kingsmen series, I decided to pen down my thoughts on portfolio construction and management, which is a topic which investment bloggers seldom (if ever) write about. During my time in the investment industry, I have had the privilege of speaking with (and some may say "interviewing") many hedge funds in order to ascertain if they are worthy of investment into, and I have met many CIOs, CEOs and also Investor Relations personnel while doing due diligence on these Funds. Some of the questions would invariably revolve around the construction of their portfolio, the characteristics of it, how they measure performance and how they monitor positions for risk and valuations, amongst others. In case the reader is wondering, portfolio construction and position sizing is actually of great importance in determining overall returns, and most investors would prefer to concentrate on what to buy/sell rather than how to manage a portfolio on an aggregate, macro-view level.

From these meetings, I have built up a good mental model of how one should go about structuring and reviewing their own portfolios, and I shall try my best to articulate these thoughts here. I may miss out one or two points as this is a discussion which can take up quite a bit of space, but I think below are the salient points which I could like to make and which an investor should take into consideration in reviewing their own portfolio's asset allocation.

Portfolio Construction

Position Sizing

As one begins to allocate capital, one has to be aware of how large a position one takes in a particular security with respect to the portfolio. This would impact the exposure of each position to losses and conversely, how well the portfolio would perform should there be significant gains. Some investors prefer to set a limit on their largest position so as to cap their exposure in case something goes horribly wrong - for example a 5% maximum position for a $100,000 portfolio means you do not invest more than $5,000 in any one company. What I would recommend is to look at risk-reward trade-offs in order to determine sizing for each position - positions with less risk should ideally be scaled up higher in % terms compared to positions with more risk. Of course, risk itself is subjective and cannot be quantitatively measured (no, beta is NOT risk), and the investor has to review each position to decide on the amount of risk versus reward which he is expecting. Obviously, this is not an easy task but it is important and the investor should therefore spend time to think this through before proceeding. I have heard cases of high-conviction positions which have suffered badly due to a negative event, and this unsurprisingly causes significant drag on portfolio performance.

For myself, Kingsmen Creatives is my largest position at around 25% of my portfolio (based on market value, vested portion only, excluding cash), and this is probably the maximum limit I would go for a single position.

Number of Positions

This is determined based on the ability of the investor to properly keep track of the business behind each security, and also the comfort level with which he has over its business characteristics. Of course, every investor differs regarding the amount of information and monitoring he can handle. What I would recommend is around 8 to 10 positions for a concentrated portfolio for a full-time working adult, and around 15 to 20 positions for a full-time investor (i.e. no day job). This is just a suggestion and is by no means a definitive guide to the "right" number of securities.

For myself, I currently have 11 positions but am aiming for around 14-15 positions in time to come, and as I do more deep research on other promising companies.

Sector/Industry Exposures

Another aspect to look out for is the sector or industry exposure for each position, and to assess if there are any overlaps or gaps. For example, if an investor is investing into a portfolio consisting of (for example) only property developers (CDL, Capitaland etc), then he is only exposed to real estate as an asset class and industry and therefore his risks (and rewards) would be concentrated on just one sector. This would obviously be a boon if the sector does well, but it would mean that the entire portfolio is exposed to risks belonging to just one sector and there is no way to buffer against negative events (e.g. government-imposed cooling measures).

Ideally, an investor should try to diversify his exposure to different industries. There are two reasons for this. Firstly, he should try to capture growth from the many different industries out there which show promise and positive trends, examples of which could range from artificial intelligence, advances in cancer research, self-driving cars, tourism boom etc. By just limiting himself to one sector, he is missing out on potential growth in a myriad of other sectors. Secondly, he should diversify to lower the risks of a blowout or negative event in any one particular sector, an example being the Chinese Government's recent move to limit the release of games subject to more stringent conditions being imposed. This would have hit game developers across the board and caused their valuations to plummet. If the investor had only limited exposure to this sector, then his investments in other sectors would provide buffer for the entire portfolio.

To use my own portfolio as an example, I am exposed to the following industries with regards to each position, and I feel this sufficiently diversifies my portfolio:-

Boustead Singapore and Projects - Geo-Spatial Technology (Indonesia, Australia), Oil and Gas (global), Industrial Real Estate (Singapore, Malaysia, Vietnam, China)
Straco - Tourism (Singapore and China)
Kingsmen Creatives - Thematics, Events, Exhibitions, Retail and Corporate Interiors, IP ownership (South-East Asia)
Design Studio Group - High-end furniture manufacturing, joinery work (Asia, Middle East, USA)
iFast Corp - FinTech Platform provider (Singapore, Malaysia, Hong Kong, India and China)
FLT and Keppel DC REIT - Australian and European industrial properties and data centres respectively
Suntec REIT - Retail malls in Singapore, commercial property in Singapore and Australia
NetLink NBN Trust - Fibre Network cabling in Singapore
VICOM - Testing and inspection services (Regional + Asia)

Country/Region Exposure

Equally important is also the portfolio's exposure to different countries and regions. Some would argue for direct investment in the stock markets of other countries, but I feel that there are two major risks here - taxes and currency, which may negatively impact the portfolio. Therefore, one can gain indirect exposure to other regions and countries through investments in Singapore-listed securities.

As can be seen above, I have exposure to mostly South-East Asia and North Asia, with only a few companies (e.g. Boustead SG and Design Studio Group) giving me global and Middle Eastern exposure too. I feel that there is more than enough growth in this part of the world which the portfolio can capture, without venturing too far from Singapore. On the other hand, investors may wish to invest in international companies such as Unilever, Nestle, Apple or Amazon (just to name a few), but these have their own risks (taxes, forex) and also generally higher valuations which one has to be mindful of.

Presence of Dividends (and Dividend Yield)

Another important criteria which one should evaluate for their portfolio is whether a security pays dividends. Dividends can form an important component of total return for a portfolio (for info, for my portfolio, it is 2/3 dividends and 1/3 capital gains for all my realized gains). One should review the frequency of dividend payments (e.g. iFast pays quarterly, and so do most REITs) and also the historical dividend yield.

Dividends are good for cash flow if one is a long-term investor and does not wish to actively transact, therefore the liquidation of any position (even partially) may be a very uncommon event. This means the investor would have to rely on dividends to extract some form of cash flow from his portfolio. These dividends can also be reinvested in order to enjoy the much talked-about compounding effect over time.

Note that every company in my portfolio pays a dividend, except for Design Studio which is at the trough of their cycle (and hopefully it will start paying again when things recover), so readers can tell that this is a very important criteria for me.

Cash Level

This is a question I always ask Fund Managers at the end of every meeting - how much cash do they typically keep within a portfolio? The usual answer varies from 0% (fully vested) to around 15%, but the average usually hovers around 5% or so. So what exactly is a "cash level" and why is this so important?

The cash level within a portfolio would indirectly show an investor's comfort level with current valuations and whether he perceives any opportunities to further add on to positions or to switch out of less attractive positions to more attractive ones. My recommendation is to never be fully invested (i.e. 0% cash level) as this means that you would not have any ammunition to average down should there be a market crash or severe downturn. Bear markets are a separate topic altogether which I will do a blog post on some other day, but note that bear market or not, it is always important to keep some cash handy as an "opportunity fund" (note I have indicated this in my monthly portfolio summary), ready to deploy when valuations become attractive.

Conversely, cash levels which are too high (I would say in the region of 30% to 50%) would suffer from "cash drag" and lower overall returns for the investor, as it would mean that cash is not deployed in the most efficient manner to generate returns for the investor. Some investors may prefer to sit on a mountain of cash as it brings them comfort because they are always worried about a crash coming round the corner. The sweet spot, I feel, would be a cash level of around 5% to 10% (of course, this depends on the absolute value of your portfolio - a $10,000 portfolio may be just starting out and you may have another $10,000 to deploy, in which case it is "forgivable" to have a cash level of 50% ($100,000 over $200,000)). This is to ensure you have enough firepower for averaging down on selected attractive positions, while also not letting too much of the cash rot away in a bank account earning close to zero returns.

Portfolio Management

Now that I have briefly discussed on portfolio construction, it's time to look into the equally important aspect of portfolio management. By "Management", I refer to how one should continually monitor and keep track of the portfolio, much like the way a gardener keeps track of his young saplings or mature crop. Using the plants analogy, a portfolio is something which you need to grow, water and nurture so that it will perform well, and also save you lots of heartache in case any position suffers a blow-up.

Monitoring and Assessment

Monitoring is an essential feature of any portfolio and the astute investor should spend sufficient time and effort to keep up with the financials and business outlook for the companies he has invested in. At the very least, reviewing and reading the quarterly statements, press releases and presentation slides should be mandatory; while also reviewing any periodic or ad-hoc corporate announcements concerning M&A, contract wins or other pertinent newsflow. Assessment here would relate to assess news and articles on an on-going basis in order to ensure one is kept abreast of the latest developments within each industry which affects his investments - this may seem daunting as there is a lot of information to track and read daily, but the investor should learn to filter out unnecessary noise in an intelligent manner and also to ensure he can speed-read and scan headlines for news which is deemed more important. In that way, he can maximise the use of his time and not fall into the trap of "analysis paralysis" - being swamped with too much information!


Re-balancing refers to the act of trimming certain positions or adding on to others, or to sell away some positions in order to add new ones. In a nutshell, it means making changes to your portfolio on an on-going basis. For myself, I do not feel much need for re-balancing unless my investment thesis gets invalidated, in which case I would need to sell one of my investments (e.g. in the cases of MTQ, SIAEC and The Hour Glass). Otherwise, it can be a case of just adding on to positions when they become suitably attractive, thereby increasing your stake in that position.

The investor needs to re-calculate his exposure upon any exit or entry (or addition to existing) to ensure he does not violate any of the rules he set out in his investment philosophy. An example would be not adding more to a position if it means exceeding a threshold of say 10% of the portfolio. Another option is to allow the limit to be exceeded temporarily but to slowly add to other positions in order to dilute down the weightage of that position to a more manageable level.

There are many different ways to re-balance a portfolio so I will not go into too much details as this is very personal for each and every person, but suffice to say this is an exercise which should be carefully thought out and even modelled (yes, in Excel!) before it is done, as it can have repercussions on performance and also margin of safety.

Optional: Updating intrinsic values for all major investments

This is an activity which the investor can choose to do should he have sufficient time. Once the latest financials are released or information provided on certain actions or strategies for the Company, one can re-assess and re-compute their intrinsic value for the Company. This is to review each position to see if the risk-reward ratio has changed (for better or worse) and to decide if re-balancing is needed, or if there is a need to sell to raise cash levels for a more attractive opportunity.


Constructing a robust portfolio is a time-consuming affair and the investor should be mindful that it can only be done with a lot of patience, study and also experience (i.e. making mistakes). The idea here is to start off with a few investment ideas and slowly curate the portfolio as one evolves and crystallizes one's investment philosophy. This should obviously be an iterative process as portfolios are dynamic and should not be stagnant or be perceived as static, as businesses are also changing and evolving daily. The above pointers should serve as a useful guide for anyone who wishes to start a portfolio but does not know the various aspects to consider.

Stay tuned for Part 3 of the Kingsmen analysis coming up in my next post.

Monday, September 10, 2018

Kingsmen Creatives - Revisiting The Thesis Part 2

Part 2 of this series exploring Kingsmen Creatives will focus on the Group's financials, namely revenue trends, margins and the all-important cash flow. I shall do this from a practical standpoint - what an investor looks for is essentially cash which a Company generates, in order to justify the valuation paid for a business. While profits are the most looked-at number when investors open up a set of financial statements, ultimately it is the cash flow that you receive which you can spend - you cannot spend profits! So this analysis shall focus more on the cash flow generative aspects of the business; as profits can often be affected and influenced by accounting policies, assumptions and also one-off exceptional items.

The above table summarizes the 8-year historical numbers for Kingsmen. I have deliberately left out the entire chunks of P&L, Balance Sheet (B/S) and Cash Flow Statement (CFS) even though I do have them all on file (include all quarterlies), because it would be too heavy for the reader and what I wish to do is to zoom in on important numbers and ratios to simplify the analysis. We shall therefore look at revenue trends, margin trends, expenses (and some line items), NPAT margins, cash and net cash balances and FCF generation. I will also briefly talk about dividends history for the Company in a later section within this post.

Revenue Trends

Kingsmen's revenue was on an uptrend from 2010-2014, and it was only in 2015-2016 that it took a dip, mainly due to the luxury segment for Interiors being negatively impacted. 2017 saw a year on year (yoy) drop of -6.8% in revenue, and this seemed to signal that growth had plateaued and that the Group could no longer increase top-line. However, Benedict (Chairman) did mention that increasing revenue was not an issue for the Group, but the problem was in getting decent margins for the work they did, and also whether they had the manpower and expertise to pull off these contracts in a timely and efficient manner. The conclusion from this is that the Company did not wish to merely "chase" contracts to make top-line look good and to show "growth", but instead remained selective on the type of work they chose in order to ensure they earned a decent margin and that they could deliver on their obligations. Of course, this was predicated on the fact that gross margins and also EBIT and net margins had been impacted due to the luxury spending slowdown which began in 2015 with China's Xi Jinping clamping down on lavish spending and corruption, which made many luxury brands rethink their strategy of rapid expansion and opening large stores in a roll-out campaign (recall that Kingsmen had a distinctive edge when it came to such roll-out programs as they could coordinate the simultaneous opening of stores by a specific brand across multiple countries due to their presence in these countries).

Of course, one could argue that with the current state of affairs (i.e. e-commerce remaining dominant and growing and replacing more brick-and-mortar business), Kingsmen's revenue would also be under pressure. But the E&T division would still be able to take on more jobs as the MICE industry is still booming and expansion, while more and more theme parks are sprouting up in Asia and the Middle East; plus the Interiors Division has restructured itself over the last 3 years to diversify its client base and also preserve gross margins. Hence, there would still be opportunities for revenue growth as Kingsmen tackles new trends (e.g. experiential malls like the upcoming Funan Centre), and this is also not accounting for potential new revenue streams from their planned IP division (more of this in Part 6).

Margin Trends

No discussion is complete without talking about margins, and here I would like to focus on the gross margin ("GPM") as well as the key expenses which flow down to the net margin ("NPM"). There will also be some discussion on future expenses, trends in expense movements and how I see margins trending over time.

GPM for Kingsmen is indicative of how well they can price their services and from the table, one can see that Kingsmen's GPM is remarkable consistent at around ~25%. However, quarterly earnings would show that post-2015, GPM actually dipped to around 22% (1Q 2016) as luxury retail expansion slowed and Kingsmen had to go for fit-outs for more mass market and affordable fashion-type clients. These jobs obviously have more contractors competing for the same pie and hence, Kingsmen had to price their services lower to remain competitive and hence suffered a fall in GPM. However, in 2017 and 2018, GPM has managed to stabilize at 25% over all divisions as Kingsmen has expanded their client base and also taken up different types of jobs in order to fill the order book (e.g. cafes like Greyhound Cafe). So my conclusion here is that GPM should not be a major issue for the Group going forward as their E&T division enjoys good economics and Interiors has also somewhat recovered.

For NPM, however, one can clearly see that Kingsmen has been hit badly in 2016 and 2017. Where NPM used to hover between 5% to 7% (and Benedict also mentioned that the Group managed this for around 10 consecutive years despite competition and overall higher costs), it has now dipped to 3.6% in 2016 and 3.2% in 2017. Management has taken pains to reiterate that this is NOT a situation which they are pleased with, and they are working hard to move NPM back up to the previous 5% to 7% level. The way I see it, this would be tough in the near-term as there has been a structural change in the retail sector (more on this in Part 5) which has permanently crimped spending by multi-national luxury brands. However, there are some mitigating factors which may lift overall NPM which I will detail below.

The 3 key items of expense for Kingsmen would be D&A (Depreciation and Amortisation), Rental Expenses (as their current premises at 3 Changi South Lane is rented) and staff costs (as the Group has many project management teams and offers services rather than products). Depreciation is slated to increase as Kingsmen has just completed construction of their new HQ in Changi Business Park (the building is named "The Kingsmen Experience") and will spend around $35m in total on the cost of the land + property. This translates to around $1m/year in depreciation, which is roughly the same as the ~$1m/year in rental expense which Kingsmen is paying. So this is simply substituting rental for depreciation and would have no P&L impact, but cash flow would improve substantially once Kingsmen shifts over. The lease, however, was signed up till April 2019 and so FY 2019 should see 4 months of rental expenses + depreciation expense, after which the financials would only see the depreciation expense bumping up from the new HQ.

As for staff costs, this has climbed relentlessly as Kingsmen builds its capabilities and teams and also because of inflationary factors (salary increments) as well as bonus payments (for achievement of targets in prior years, except 2017). As Kingsmen rewards staff based on net profit margin by division, this incentivises staff to try to achieve higher net margins for the division, while not compromising on work quality or standards. For 2Q 2018, Kingsmen saw a +8% increase in staff benefits expense mainly due to advance hiring for their new IP division (NERF FEC), which I will elaborate on in Part 6.

To summarize this section, the spot of light at the end of the tunnel may start getting brighter once the new IP division kicks off and starts contributing, as a lot of the costs are front-ended and sunk in earlier periods and we will only see contributions in later quarters. Net margins may be boosted by better economics from the new division and also better cost control measures undertaken by the Group for their existing Interiors and E&T divisions.

Cash Balance and Cash Flow

From the table, one can see that Kingsmen has significantly increased its cash balance from 2010 till end-2017, from $29.9m to $73.6m. This is despite significant spending in the years 2015 & 2017 (2015 - $15m for purchase of K-Fix & 2017 for the purchase of land for new HQ and on-going progress billings for construction-related costs). Borrowings have also not increased significantly up till end-2017 (at just $14.0 million), with net cash for the Group at around $60m. However, as at 2Q 2018, total debt had increased to $26m ($10.4m ST and $15.6m LT) while net cash had declined to $44m. This is in line with what Management had communicated regarding borrowings to fund part of the construction of the new HQ. Moving forward, I would expect the debt to increase more in order to fund the development and construction of Kingsmen's first NERF FEC, but this should be balanced out by healthy operating cash flow from their core business.

For the cash flow section, one can see that for every single year from 2010-2017, Kingsmen has generated positive operating cash flows. As explained, capex was elevated in 2015 and 2017 for above-mentioned reasons and for 1H 2018, capex has hit around ~$10m thus far (residual construction costs for the new HQ). There should be no more HQ-related capex for 2H 2018, and capex should decline significantly for the remainder of the year. I would expect 2018 to be another year of positive operating cash flow, as there are signs of recovery in the Interiors business and also good prospects for the E&T division (including new contracts won and announced by Kingsmen in 1H 2018). Capex would definitely be higher in 2019 as construction of the first NERF FEC should begin with gusto, but the plan is for some of the capex to be borne by business partners so that Kingsmen does not need to cough up too much cash. More on this in Part 6.

Free-Cash-Flow ("FCF") has always been positive with the exception of 2015 (purchase of K-Fix). FY 2017 FCF yield is a low 1.5% as this was distorted by the construction-related expenses for the new HQ. If we assume a steady state maintenance capex amount of $2.5m/year, FCF for 2017 would be around ~$11m and FCF yield would be around 10% - a very compelling proposition indeed.


Dividends are an important component of total returns for any investment and also form the main reason why I purchased Kingsmen and a few other companies. My thesis is for both growth and yield, and Kingsmen's payment of regular dividends over the years provides good support for retaining this investment, while I have, over the years, reinvested the dividends from Kingsmen into other promising companies. It can be seen from the table that during the good years (2010-2014), Kingsmen paid out a total of 4c/year twice-yearly, for a pay-out ratio of between 40% to 50%. Dividends only started falling from 2015 through 2017 as earnings got hit by higher expenses and poorer retail sentiment, but Kingsmen still managed to pay a total of 2.5c/year for 2016 & 2017, which translates to a steady yield of ~4.6% at current market price of 55c.

From dialogues with Management and recent communication, I believe 2.5c/year is a sustainable level of dividend even after accounting for higher debt levels and the impending capex for the IP division. Therefore, investors purchasing at current market price can enjoy a steady 4.6% yield while waiting for catalysts to play out.

Part 3 of the analysis will delve into the different divisions of Kingsmen, their overall performance and also talk a bit about their prospects. This will differ from the industry outlook as it is more focused on the clientele, margins, mix and other numerical details.

Wednesday, September 05, 2018

Kingsmen Creatives - Revisiting The Thesis Part 1

As readers of my blog way back from 2010-2012 would probably know, back then I performed a detailed 5-part analysis on Kingsmen Creatives and posted in on my blog. Of course, much has changed in the last 6.5 years and the Company has also evolved and changed during that time, some parts for the better, and other parts for the worse. My initial idea was to present the thesis to readers and then highlight the sections which had altered or changed significantly since then; but this would have been tough for those who are not familiar with the Company or what they do.

Instead, I thought I would present the Company in a structured manner starting from a fresh slate, highlight the different aspects of it and packaging it in parts to cover it holistically and from all angles. This would cover the basic business, clientele, divisions, financials, margins, competition, strategic and future plans, changes to work culture / physical location, management and other pertinent details, both quantitative and qualitative. I believe that currently, within the investment blogosphere, there is no record of such a comprehensive analysis of a small-cap listed company - some sell-side reports do come pretty close but they generally tag themselves to a "target price" or "fair value" which is as long year. This detracts from my mission of long-term investing and distracts the reader from focusing on what is really important - the essence of what makes a Company great and why it should remain in one's portfolio for a significant period of time, barring a significant deterioration in the fundamentals and financials or a strategic shift in Management's focus and attention.

I will also cover the valuation in the latter part of the posts, but will come from the angle whereby I will comment on existing valuations and give a comparison with available competitors and industry players; but will NOT provide a fair value target price for what I deem is a very long horizon investment. Part of the reason shall be explained in the appropriate section on "valuation", but it should be easy enough for the reader to comprehend that with limited available information, building a robust financial model of any sort is close to impossible. Instead, I invest because I assessed Management's quality, the strength of the business and the robustness of the planning and steps taken to grow the business. These will be detailed in posts which will be split into parts, as follows:-

Part 1 - Introduction and Historical Background
Part 2 - Financials, Margins and Cash Flow
Part 3 - Divisional Analysis
Part 4 - Management Quality and Candour + Order Book
Part 5 - Competition and Industry Outlook
Part 6 - Future Plans, Catalysts and Strategies for Growth
Part 7 - Valuation, Sentiment and Risks

Part 1 (this post) will give a brief and concise introduction to the Group and its divisions, and also mention some of Kingsmen's clientele. Part 2 will delve into the financial highlights and the numbers which matter, including margins, cash flow and dividends. Part 3 will focus on the divisional analysis for Kingsmen, including the sales mix and margins for each division over the last 8 years. Part 4 will discuss the qualitative aspect which not many may talk about - Management candour and quality and also changes in the Management over the years, including succession planning and how staff are compensated. Part 5 will talk about Kingsmen's competitors - with a brief mention of Pico Far East (listed in Hong Kong but not strictly a competitor in many respects) and also Cityneon Holdings (which has been in the news a lot lately on their stellar results and the acquisition of their fourth intellectual property ("IP")). Part 6 is where I talk about the future for Kingsmen and their plans for growth in a new direction, with the Feb 2018 announcement of their tie-up with Hasbro to do up the NERF franchise. Part 7 ends off with a valuation discussion on Kingsmen (various methods to be considered) and also the overall sentiment surrounding the Group.

There may obviously be some overlap between sections which cannot be avoided, as some parts may reference other parts in an attempt to explain the overall thesis and why the Company remains compelling. As an example, during the divisional analysis I would also inevitably mention how each industry is faring in relation to the divisions, while Part 5 would also talk about this but also present trends in each industry and how they would impact Kingsmen and their competitors.

Disclaimer: Please note that all content which will be displayed here is obtained from public resources, including but not limited to sell-side reports, the Company's annual report(s), discussions with the Management at AGMs and also a study into the industry characteristics and competitive analysis through other pertinent reports. This is NOT intended to be a recommendation as to the merits or demerits of this investment and should NOT be construed as a recommendation to either purchase, hold or sell this security. This merely serves as a record of my investment thought process, how I view and analyze information, my thoughts on the Company (and industry) and how I see the future panning out.


Kingsmen Creatives is a leading communications and design group established in 1976 with 21 offices around Asia serving global clients. It has four main divisions namely Exhibitions and Thematics ("E&T"), Retail and Corporate Interiors ("Interiors"), Research and Design ("R&D") and Alternative Marketing ("AM").

The Group is a market leader in the MICE industry, MICE being the "Meetings, Incentives, Conventions and Exhibitions" space, and helps in the organization of events such as Singapore Air Show, Art Stage Singapore and Formula One Night Race just to name a few events. E&T division is also responsible for installations at museums in countries such as Singapore and the Middle East, as well as for theme parks such as Universal Studios Singapore (back in 2009) and Disneyland Shanghai. Their work is also displayed at places such as the Singapore Fintech Festival 2017 in Singapore, Sourcing Taiwan 2017 in Taiwan, Hyosung at Textile India 2017 in India, BMW Motorrad at Thailand International Motor Expo 2017 in Thailand as well as Seoul Lounge at Seoul Biennale 2017 in South Korea.

For Interiors, Kingsmen is well-known for their high quality of work and also on-time delivery for their clients, which span a very broad range from AIA, Fendi and SingTel, to Ralph Lauren, Tiffany and Co and Van Cleef and Arpels. Many of these are well-known international brands and have been clients of Kingsmen for many years, forming their repeat customer base which provides a recurring form of revenue. For Interiors, other clients would include Armani Exchange, La Perla, Michael Kors, Zara, Massimo Dutti, Ted Baker and Longchamp.

For more details and information on Kingsmen's work and clientele, please do download their Kingsmen Watch 2018.

R&D and AM are divisions which add value and support the main divisions of E&T and Interiors, and these would include events and road-shows and also pop-up stores which are a feature of the new retail landscape. More will be mentioned later on regarding the evolution of the retail landscape which is a key feature of how Kingsmen is adapting, under Part 3 where I will do a detailed divisional analysis for Kingsmen on their two main divisions.

Historical Background

Kingsmen was established 42 years ago with founders Benedict Soh and Simon Ong, each of whom owns around 25% of the Group. They started out doing fit-outs and brands and stressed on delivering a high quality of work even as the industry was saturated with many competitors who offered the same types of services. Kingsmen differentiated themselves by being more than just a "contractor" - instead they focused on on-time delivery, quality and slowly built up more and more scale within the business. This allowed them to push ahead in terms of market share and also build up good branding for the business - all these moves attracted the attention of international brands which proceeded to do business with Kingsmen as it saw that the Group could deliver the level of quality required for international brands to expand into the Asian region.

When Kingsmen started out, they even did the Orchard Road Christmas decorations and Benedict mentioned that he was proud of being able to achieve that milestone despite tough weather and traffic conditions! Though they have come a long way since then, the Group did not forget its past and still did up the Christmas decorations for 2017 and also recently won the bid for both the National Day Parade 2018 and the historical upcoming National History Event 2019 (which will showcase the bicentennial founding of Singapore since the year 1819).

The next Part 2 of this comprehensive analysis will talk about the financials for Kingsmen and I will present a summary of key financial numbers and ratios over the last 8 years (2010-2017). Discussions will also centre around margins, balance sheet strength, debt, capex, cash flow and dividends.

Friday, August 31, 2018

August 2018 Portfolio Review

As was the style with my blog previously, I would always do a month-end review and summary of all portfolio positions. The display would only include my purchase price, market price and capital gain/(loss). Please note that the portfolio review is simply to catalogue all corporate announcements and associated news flow relating to my positions - it is NOT to be construed as an attempt to "brag" about portfolio size or to sound arrogant over specific security choices. If there is any indication of this occurring, then I apologize in advance.

1) Suntec REIT - There was no news from the REIT for the month.

2) Boustead Singapore Limited ("BSL") - BSL released its 1Q FY 2019 earnings on August 13, 2018. Revenue was up +18% yoy to $107m, while GP was up +26% from $33m to $41.4m. NPAT was up +315% to $12.2m, mainly due to a one-off gain of $5.9m from the disposal of a property held for sale (25 Changi North Rise - see BPL) and forex gains of $1.5m. Balance Sheet continued to remain robust with cash of $$280.5m against total debt of $72m (net cash of around $208.5m). OCF was $22m and capex excluding the purchase of WhiteRock Medical was just $161k, so FCF was ~$20m. Acquisition of WhiteRock Medical announced in June 2018 amounted to $19m (as announced), but net of cash the purchase consideration was less at $15.5m. Divisional performance saw improvements across all divisions, with revenue rising on a yoy basis (for Geo-Spatial, the change was due to the change in revenue recognition policy from the adoption of SFRS(I) 15). The change front-loads more of the revenue from the maintenance portion of the contracts early on, and less revenue is thus recognized at the back-end of the contract.

PBT for all divisions also improved but note that energy-related engineering was impacted by exchange gains, while real estate solutions was helped by the disposal of a property (more in BPL below). The good news is that order book backlog improved to $304m as at end of 1Q FY 2019 (consisting of $102m under Energy-Related Engineering and $202m under Real Estate Solutions). Comparative numbers for 1Q FY 2018 were $209m total order backlog (of which $72m was for Energy-Related Engineering and $137m for Real Estate Solutions). So to summarize:-

Total Order Backlog: $304m (+45.5% yoy)
Energy-Related Engineering Order Book: $102m (+41.7% yoy)
Real Estate Solutions: $202m (+47.4% yoy)

I am planning for a comprehensive review of BSL and this should come in due course (slated for perhaps October if I am still blogging by then), and hopefully it will come out before the release of the 1H FY 2019 earnings (which should include the new "Healthcare" division by then).

3) Boustead Projects Limited ("BPL") - BPL released its 1Q FY 2019 earnings on 10 August, 2018. Revenue was up +7% yoy to $48.7m, while GP was up slightly more at +8% yoy to $15.7m. NPAT was up +73% yoy to $10m, mainly due to the one-off gain mentioned earlier under BSL. Cash on Balance Sheet increased further to $129m from $111m 3 months ago, and total debt remained fairly constant at $69.1m. FCF continued to be very healthy, with 1Q FY 2019 registering an OCF of $12.8m and capex of just $31,000; and overall cash inflow from the three sources came to $17.6m.

On a divisional level, design and build revenue was up +9% yoy while leasing revenue was down -5% yoy, and this was mainly due to lease expiry at 85 Tuas South Avenue 1 in January 2018, which was partially offset by fees from BDP. PBT for leasing dropped more significantly, by -30% yoy, due to higher overhead expenses, investment in new capabilities and additional professional fees. While this is a cause for concern, I will treat it as an investment in BPL's future and will continue to monitor this for now.

One piece of positive news is that BPL has managed to secure a new tenant on a long-term lease for 85 Tuas South Avenue 1 (which has been vacant since January 2018). However, as there are A&A works ongoing to prepare this property for the new tenant, rental cash flow will only commence from FY 2020 onwards (i.e. April 2019 onwards). Pre-committed space at ALICE @ Mediapolis and the first phase of marketing of the Boustead Industrial Park in Vietnam are proceeding well, and should bear fruit in the next 12-18 months.

4) Design Studio Group ("DSG") - There was no news from DSG for August 2018. The Group had just released their 2Q 2018 earnings on July 19, 2018; the numbers showed some improvement with revenue increasing +44% and NPAT rising +340% (albeit off a low base). $109.5m worth of new orders was secured in 1H 2018 alone (for an average of around $18m per month), compared to just $13.5m in the whole of 1H 2017. Order book as at end-June 2018 stood at $157.1m (+10.8% yoy), which was $141.8m as at end-June 2017. With the arrival of the new CEO Edgar Ramani last year, DSG is undergoing a slow, steady but painful transformation to wipe the slate clean of old inventories and also to better prepare the firm for more consistent, sustainable growth. The AGM slides had also demonstrated that the new Management (along with newly-appointed CFO Ronald Kurniadi) has garnered some momentum is securing more contract wins; now they have to demonstrate that they can deliver, collect on receivables and also earn a decent margin. I will have to closely watch DSG in future quarters as it is currently my worst-performing position.

5) Kingsmen Creatives - I must admit I am puzzled on Kingsmen. No doubt the last 2-3 years has seen earnings fall off a cliff and net margins contracting from a once-healthy 6% to 7% to the current 2% to 3%, but recent news and announcements on contract wins and also the tie-up with Hasbro for the NERF FEC (Family Entertainment Centres) did not seem to spark any buying interest at all, thereby keeping the stock at depressed trough valuations. This is actually a blessing in disguise as I managed to accumulate more shares in Kingsmen for my CPF IA at an average price of 55c/share, and this comes with a 4.6% yield paid twice-yearly (1c interim, 1.5c final).

August corporate announcements would include the incorporation of a wholly-owned subsidiary in Singapore called NAX (Singapore) Pte Ltd with a paid up capital of SGD 1.6m, as well as the Group's 1H 2018 earnings announcement. More will be shared on this in my detailed Kingsmen review and report coming up next month, but in a nutshell, revenue was up +8.9% yoy while GP was up a smaller +2.8%. NPAT was up +6.1% and an interim dividend of 1c/share was declared, unchanged from last year. On August 21, 2018, Kingsmen also announced that they had increased the paid-up capital in their K-Fix (Nantong) subsidiary from zero to USD 3 million, demonstrating their commitment to the fixtures business and possibly also in anticipation of more contracts due for JEWEL and NERF FEC construction.

6) VICOM - VICOM announced its 2Q 2018 earnings on August 6, 2018. For the second quarter, revenue increased by +2.4% from $24.1m to $24.7m. EBIT increased by a higher +5.1% from $7m to $7.36m but NPAT only increased by +2.9% yoy mainly due to higher tax expenses. The balance sheet remains clean with no debt and cash balance of $97.9m, and FCF generated in 2Q 2018 was $4.4m versus $5.2m in 2Q 2017. An interim dividend of 13.46c was declared, against 13.12c a year ago. This represents a pay-out ratio of exactly 90% based on the 1H 2018 EPS of 14.95c/share. I am very happy to continue owning this Company as it is providing me with a yield of almost 10.6% (at 36c/year) based on my purchase price of $3.408.

7) Straco Corporation - Straco announced its 2Q 2018 earnings on August 14, 2018. Revenue fell by -6.4% yoy from $30.2m to $28.2m, and this was mainly due to a slight dip in visitor numbers (~1.2% lower yoy at 1.22 million visitors) and also a tax waiver not being issued yet for ticket revenue collected for SOA. NPAT fell by -5.1% yoy $10.8m, and 1H 2018 NPAT stood at $14.4m, a drop of -29.3% yoy mainly due to the operational issues at the Singapore Flyer which caused a shutdown from mid-January till end-March 2018. The Balance Sheet remains very healthy with $180.5m of cash and debt of $44m (note that Straco pays down $12m worth of debt every year - or $1m per month). FCF also remained strong at $12.2m, though down compared to 2Q 2017 with $16.4m of FCF. Currently, there is no cause for undue worry as cash continues to build up on the Balance Sheet despite the payment of a 2.5c/share final dividend for FY 2017. Potential catalysts would include the redevelopment of the Singapore Flyer (Flyer 2.0) as well as higher ticket prices for both SOA and UWX (subject to the Chinese Government's approval).

8) iFast Financial - iFast had just released their 2Q 2018 financials in late-July 2018. I will avoid giving a run-down of the numbers as the Company has many numbers to run through - gross revenue, net revenue and also NPAT split by territories and recurring / non-recurring revenue. AUA (assets under administration) hit a new record high of S$8.33b as at June 30, 2018, revenue was up +25.4% yoy and NPAT was up +40.4% yoy. Balance Sheet remains debt-free with cash of $25.8m and very strong FCF of $9m was generated (these are two factors which determine why I like this Company). The Group declared a 2Q interim dividend of 0.75c/share, up from 0.68c/share a year ago.

Also, on August 21, 2018, iFast announced that it had appointed PwC Corporate Finance as the lead financial advisor in relation to a potential capital injection for their Greater China business. iFast's intention was to enlarge the share capital of their Hong Kong and China holdings by about 15%. Assuming the dilutive effect kicked in, it would improve the Group's NPAT for FY 2017 by around S$0.34m (as the China business had incurred a loss for FY 2017).

9) Keppel DC REIT - The REIT announced, on August 7, 2018, that it will be expanding its footprint in Sydney, Australia with a new shell and core data centre. This will be built on vacant land and will cost between A$26m to A$36m (final costs yet to be determined) and will be backed by a 20-year triple-net master lease when completed. It will feature a minimum NLA of 86,000 sq feet and is expected to be completed between 2019 and 2020. This transaction will increase the WALE of the portfolio from 8.8 years to 9.9 years assuming the transaction had occurred on June 30, 2018, and the portfolio aggregate NLA will increase to 1.198m sq feet.

10) Frasers Logistics & Industrial Trust ("FLT") - FLT had a slew of announcements in August 2018, which I will try to summarize. Earnings-wise, revenue for 3Q FY 2018 (the REIT has a Sep year-end) increased by +22.6% yoy from $40.2m to $49.3m, adjusted NPI was up +27.4% and income available for distribution was up +22.4%. This was mainly due to the acquisition of German and Dutch properties as announced by FLT some time back; but though income rose a lot, a rights issue also enlarged the issued share capital base and therefore DPU was up by just +2.9% from 1.75c to 1.80c.

Aggregate leverage at 36.3% meant that the REIT would have room for more borrowings for accretive M&A, and weighted average cost of borrowings was low at just 2.5% with average weighted debt maturity of 3.2 years (all as at June 30, 2018).

On August 6, 2018, FLT announced the divestment of Lot 102 Coghlan Road in South Australia for A$8.75m, which represented a +36.7% premium to book value. This is one of the smallest and oldest assets within the portfolio, representing just 0.2% of the total portfolio value. The divestment therefore allows FLT to recycle capital as this asset has limited future income growth potential.

On August 31, 2018, FLT announced the acquisition of two properties in Sydney and Brisbane for A$62.6 million. The average property age is 1.0 years with WALE of 5.7 years, and these acquisitions will be financed from the proceeds of the sale of the two properties 80 Hartley Street and Lot 102 Coghlan Road. The acquisition should be completed by September 2018 and FLT's portfolio will then contain 82 properties with GLA of approximately 1.9 million square metres with portfolio value of around ~A$2.9 billion.

11) NetLink NBN Trust ("NetLink") - NetLink released its 1Q FY 2019 earnings ended June 30, 2018 (it has a March 31 year-end, in line with SingTel). Revenue was up +2.8% against forecast and EBITDA margin was at 70.8%, while PAT was up +27% against projections at $19m. NAV per unit stands at 78.8c/share and there was a +2.1% increase in residential and non-residential fibre connections, while NBAP connections saw a +35.2% increase since March 31, 2018. The Trust is on track to deliver on FY 2019 projected distribution, and the distribution yield should be around 5.7%.

General investment blog trends and observations

As I had been away from the blogging scene for the last six and a half years, I thought it might be good for me to pen down my thoughts in general on how the blogging scene has evolved, the general tone and language used in investment blogs nowadays and also the overall sentiment I detected through others' portfolios and transactions. Please also note that I am not pointing fingers at any particular blog out there - these are just general observations I made and am putting down on paper for future reference.

More entrants, less details

The first general observation is that after I stopped blogging, the blogosphere has literally exploded with many new entrants. Some bloggers may just be starting out, while other veterans have continued blogging. This has undoubtedly expanded the investment blog universe and given readers a plethora of choices in order to enhance their knowledge on companies, industries, markets and trends. However, I also realized that many of the blogs contained less detail - namely on the investment thesis behind each purchase or sale, why the portfolio was being structured this way, a comprehensive review and assessment of risks versus rewards, and also an admission of mistakes made along the way. Some of the above attributes were either absent, or not fleshed out in sufficient detail to justify a particular action.

Many blogs simply provided an account of their portfolio structure (by % or monetary value per security), some in a pie chart, others in tabular format, their transactions (and associated gains or losses) and also a simple summary of their investment plan or philosophy. This is perfectly fine if you intend to keep a sort of "diary" for transactions online, but I feel it may fall short if the investor wants to studiously keep track of his rationale for buying/selling, his thought process behind mitigation of risks, and also his views on valuation and business prospects.

More trading, less investing

Obviously, I cannot expect everyone to be an investor, much less a value investor; but most of the "investment" blogs should probably be named "trading" blogs. This is due to the frequency of transactions, most of which are conducted at a frenetic pace - buy this, sell that, with not much justification as to why one should stop owning a good business and switch instead to another. Most of the blogs seem to focus more on "taking profit, locking in gains, setting a stop loss" rather than wanting to own more of a great business and to see it grow with time. This is something I find tough to comprehend.

Apparently, capturing "maximum upside" with frequent trades seem to be more the fashion than owning a stable, consistent portfolio of companies which grow over time and which contribute a steady stream of dividends to the patient investor. I see two reasons for this - the increasing ease with which one can gain access to trading apps contributes partly to the increasing trend with which people tend to "flip" stocks (or "stir-fry" stocks if you are aligned with the China way of thinking), making holding periods increasingly short. The other reason is because most of the newer investors have never ever experienced a bear market, thereby letting ebullience take over their senses and clouding their vision with a perpetually sanguine outlook. The requisite "buffer" which is essential to any portfolio seems to be conspicuously absent from most investors' portfolios or even if there was one, does not seem to be articulated in a detailed enough fashion for even the investor himself to gain comfort. If all they have seen thus far is a steady stream of rising prices, then why is there ever a need for a buffer?

More macro appeal, less corporate deep-dive

This is probably one of the most glaring observations I have made over the course of the last few years - where headlines get larger and more glaring in a world of never-ending news, and where media outlets continually spew a steady barrage of head-turning, gut-wrenching bad news. Amidst this roller-coaster of emotions, investors who follow this incessant flow would inevitably feel nervous and emotional about the world and their shareholdings. And this, in a nutshell, is going to be extremely detrimental to their long-term wealth.

Let me put it this way - there is ALWAYS some kind of bad news in this world. The job of the media is to highlight the bad news and to accentuate it as much as possible so that they can sell subscriptions and attract eyeballs. That is their job and objective and they perform it creditably and admirably. However, as an investor, we would do ourselves a favour by ignoring around 98% of the headlines, and just focusing on the few which matter (~2%) - and these should be the ones which tie in to corporate and industry news and which directly have an impact on the companies within our portfolio.

Deep-dive due diligence is by no means easy. It is tedious, frequently boring, time-consuming and also difficult. News flow can help in this regard - by zooming in on articles written on companies, one can immediately get a summary of the important points one needs with regards to any corporation, without needing to undertake a read of the latest annual report or (horrors!) the prospectus. But many blogs do not devote sufficient time to discussing corporations in deep detail, instead letting macro-factors dictate their buy and sell decisions with perhaps just a superficial, surface-level review of the business. It seems washing machines and refrigerators receive much more due diligence from buyers than shares in companies......

The next post (or series of posts) would be on Kingsmen Creatives, where I will do a comprehensive and deep review of the business and also talk about how I feel the shares are currently providing a lot of value, along with a respectable yield with limited downside.

Saturday, August 25, 2018

July 2018 Portfolio Snapshot

As promised, I present below my revamped portfolio after my six and a half year hiatus. I will not be using this post to go into details on each new position, but it is more to highlight how the portfolio has evolved over the years where I have added to existing positions, and also initiated on new positions to hold for the long-term. Note that the portfolio has also expanded from the six positions I held as at end-Jan 2012, to the current eleven (11) holdings that I now own. This is in line with my intention to diversify my holdings instead of concentrating too much on a few core positions, as events had occurred in the intervening years which made me realize that there is only so much you can know or control. There are other reasons for increasing the breadth of the portfolio, which I will detail in later sections.

As can be seen above, I have included two additional columns (but only in this July version) - the profit % after including dividends and also the CAGR (i.e. holding period return) for each position. This gives more colour and also helps to explain how my philosophy in being prudent and holding good companies over the long-term translates to decent (but not spectacular) holding period returns. Most importantly, I believe that these companies can weather a bad storm and economic crisis and still be able to emerge battered but relatively unscathed, due to their strong Balance Sheet and prudent Management style and also low debt levels.

One notable aspect is how my cost has increased over the years, from the $252,800 to the current $469,474. This was the result of disciplined additions over the years to the portfolio, while limiting divestments mainly to the three companies mentioned in the previous post. My philosophy is to continue to increase my stakes in well-run, prudently-managed companies which are under-appreciated by Mister Market, and over the years this has translated into investments both in existing holdings as well as new holdings. The idea going forward is to continue to add to the portfolio in a disciplined manner to raise the cost base in order to improve the overall absolute dividend.

The reason for the realized gain being significantly higher (from $69,550 as at end-Jan 2012 to the current $201,653) was due mainly to dividends, and was not a result of stellar capital gains from any one security. In fact, though the initial years 2012-2014 saw very good performances, this was dampened by 2015 and 2016 where performance lagged badly when certain companies within the portfolio suffered from business issues and competition. That said, the state of the portfolio now is such that the companies within suffer from woeful neglect and a lack of sell-side coverage, and has priced in most of the pessimism over the last 18-24 months; therefore I would argue that most present very good value if you have a 3-5 year time horizon with limited downside potential (barring a sharp and unexpected recession or downturn where investors are forced to sell their holdings).

The dividends received over the years have been compiled as follows:-

2012: $14,185
2013: $17.680
2014: $16,709
2015: $15,387
2016: $23,215
2017: $24,585
2018: $12,448 (year-to-date, accounts for received dividends)

Total 2012-2018 (YTD): $124,210

Another notable difference is the use of my CPF Investment Account, which was only activated this year. As I have already paid off my HDB loan in late-2015, I managed to accumulate a sizeable balance in my CPF OA account, out of which only 35% can be utilized for equity purchases.

The emphasis over the years has been capital preservation with a constant focus on risk. It is always important for me to protect my downside and avoid losing money than to shoot for the stars and end up crashing into Earth like a supernova. Of course, having a concentrated portfolio of 6 companies back in 2012 meant there would always be significant volatility associated with the portfolio, which explains the returns fluctuating wildly over the years.

My returns profile is as follows:-

2012: +35.0%
2013: +41.5%
2014: +3.5%
2015: -23.4%
2016: -1.7%
2017: +12.1%
2018: -8.1% (YTD July 2018)

Total portfolio CAGR from 2007-2017 = +7.1% per annum (inclusive of dividends)

The strong performances in 2012 and 2013 were due mainly to positions in MTQ and Kingsmen which increased significantly, and the large drawdown in 2015 was due in part also to the subsequent crash in oil prices which caused a sharp re-valuation in MTQ and also the luxury spending troubles which plagued Kingsmen in late-2015, causing NPAT to fall over the last three years and dividends to be cut from the 4c/year level to the current 2.5c/year level. 2016 and 2017 were years where I built up the portfolio to become more diversified and robust, relying on less concentration than before, though my largest positions still accounted for around ~40% of the portfolio. REITs were added just last year in order to form a stable base of dividends but also with an element of growth, as the gearing levels for these REITs allow for debt headroom for M&A and each REIT also has a long WALE with higher overall occupancy rates. I will be describing some of these new positions in detail in subsequent posts, and will also be revisiting existing positions which I have held since 2012 (namely Kingsmen Creatives, VICOM and Boustead) to check on the thesis and why I would still be adding to two of them.

A summary of transactions since Jan 2012 is provided below:-

2012 & 2013

No additions or divestments


·         Increasing stake in Kingsmen Creatives
·         Purchase of Straco Corporation
·         Divestment of SIA Engineering


·         Acceptance of scrip dividend from Boustead Singapore
·         Dividend-in-specie of Boustead Projects
·         Purchase of Design Studio Group


·         Increasing stake in Design Studio Group
·         Increasing stake in Boustead Projects
·         Increasing stake in Boustead Singapore


·         Increasing stake in Kingsmen Creatives
·         Purchase of iFast Corporation
·         Purchase of Frasers Logistics & Industrial Trust
·         Purchase of Keppel DC REIT

2018 (Year to Date)

Increasing stake in Kingsmen Creatives
·        Subscription to and acceptance of rights issue (1 for 10) for FLT
·        Purchase of NetLink NBN Trust
·        Purchase of Boustead Singapore (CPF Investment A/C)
·        Purchase of Kingsmen Creatives (CPF Investment A/C)

I would like to emphasize again that the portfolio has been structured to withstand a large drawdown and to remain resilient in the face of economic shocks. It is NOT geared towards high returns and to capture maximum upside. The main aim is to buffer against downside by purchasing companies with strong balance sheets, good cash balances and which generate healthy amounts of FCF.

My next post would be the month-end post where I will summarize any corporate news flow or earnings announcements from the companies I own.