Kingsmen Creatives - Analysis of Purchase Part 1

I purchased shares in Kingsmen Creative on January 25 and 26, 2010, and the following few postings will elucidate the thought process and analysis which went into the rationale for the purchase decision. Note that some of the factors which led to this decision are qualitative by nature, and are also known as “intangibles”, but are nevertheless important in assessing if a company is suitable for investment. Though an objective assessment would be difficult to predict if a Company will continue to do well, a somewhat rational look at the business model and Management quality does give some hints as to what may come. That said, an investor should always prepare for some risk of partial permanent loss of capital, no matter how thorough or detailed the research is. My job is to minimize the risk of loss, and maximize the probability of gains over a decent period of time; and as the business grows.

This analysis will be split into several sections, of which I will cover the industry in which Kingsmen operates, its competitive climate, its financials, fundamentals and business units (divisions); and also its prospects, plans and investment merits (and demerits). Part 1 will touch on their business, industry characteristics and Profit and Loss + Balance Sheet.

Introduction – Kingsmen’s Business

Kingsmen Creative was formed in 1976 and has, in all this time, been a leading provider of integrated marketing solutions; as well as specializing in its core businesses of Museums and Exhibitions (of which it assists in organizing and setting up), and Retail and Commercial Interiors, which it helps to do fitting out. It has staff strength of about 1,100 in Asia Pacific and Middle East and is a member of many associations, examples of which are Interior Design Confederation and Singapore Retailers’ Association. Kingsmen’s name is synonymous with quality and they boast an impressive clientele of blue-chip names ranging from The Gap, FJ Benjamin and Burberrys just to name a few. They have also participated in events such as the F1 Singapore Grand Prix and also the upcoming Shanghai Expo in 2010. More details of their clientele base can be found on their website. Their name “Kingsmen” actually originated from the separate words “King’s” and “Men”, which represents the belief that the customer is of paramount importance and should be served by men with commitment and integrity.

The Company is 25.1% owned each by Benedict Soh and Simon Ong, who are its founders since its inception and who are in charge of the strategic decisions and overall direction of the Company. Collectively, they own 50.2% of the company and the rest (49.8%) is the free float. The Company was listed in 2003 and has a track record of boosting revenues and earnings every year since listing, as a result of the growth of the MICE industry in Singapore and South-East Asia.

Industry Characteristics and Outlook

Basically, it is clear from the description above that the Company is in the Events Management and MICE (Meetings, Incentives, Conventions and Exhibitions) industry. It provides a niche service and is able to cover a comprehensive range and suite of services to enhance value for the client. There are not many big names within this space as most of the smaller event organizers take part in smaller-scale events. The largest company and Kingsmen’s strongest competitor is Pico Far East, which is listed in Hong Kong and is about three times the size of Pico. More will be mentioned about Pico under “Competitive Analysis” in Part 3. Suffice to say that most of the players in this industry are smaller players who do not have the scale, expertise and track record to carry out extensive and complicated projects for big-name clients.

The outlook for this industry is positive, at least for Singapore and South-East Asian region. There are many large corporations and conglomerates which plan to set up shop here in Asia and Singapore, as a result of Asian economies booming and China being the next growth engine. Big retail brands are also setting up more retail outlets in Asia as consumer spending power increases, and this all means more business for all players who concentrate on the South-East Asian region. The latest news is that more car dealers have plans to set up new showrooms in Singapore; so far three have opened in Jan 2010 alone and more are set to follow.

On the MICE front, Singapore is fast becoming a hub for such events, and it had hosted the APEC Summit successfully in 2009 and also the F1 Grand Prix since 2008. More plans are underfoot to grow Singapore into an MICE hub, and the completion of the Integrated Resorts (“IR”) will accelerate this process. Singapore is well-known for its strong economy and stable political structure and this will attract many event organizers to showcase events here, thus expanding the pie for all players, both large and small. Even in South-East Asia, countries such as China are hosting the Shanghai Expo, while the Middle East also has events coming up in which will make use of such niche services. South East Asia is fast becoming a hub for attracting major events such as motor-shows, air shows, major conferences as well as trade events. Eventually, the flow-through effects will trickle down to all players in this industry in the form of higher revenues and better earnings.

Financial Review – Profit and Loss Statement Analysis (for 3Q 2009)


From the table above, plotted from FY 2003 onwards, it can be seen that Kingsmen’s revenues have seen a steady rise from S$53.5 million in FY 2003 to a high of S$190.6 million in FY 2008, in just a span of 5 years. 9M 2009 revenues were S$151.6 million, and as 4Q is traditionally their strongest quarter, the FY 2009 results may yet surprise on the upside. However, if we observe the trend of revenue growth, it was mostly due to the expansion of Kingsmen into various new markets such as China, Vietnam and Middle East which helped to grow their revenue base. Singapore also saw heightened activity in the form of more conventions, roadshows and exhibitions and recently, there were new malls opened (e.g. ION Orchard, 313 Somerset and Orchard Central) which required fitting out by retail chains moving in to expand their market share.

Gross profit was also consistently on the rise and tracked the rise in revenues, but the important aspect to look at is gross margin, which represents control of cost of sales and related expenses in earning the income. Please note that some depreciation costs are incorporated into COGS as stated in the Annual Report, while the rest is reported on the face of the Income Statement. Gross margin hovers around 26-28% over the 5-year period, with a spike to 30.7% in FY 2008 which I would regard as an anomaly. The current 9M 2009 gross margin is 26.4% which is in line with historical precedents, and is also a result of Kingsmen taking on higher value contracts which offer better revenue visibility, but slightly lower margins. By contrast, Pico Far East has margins as high as 33.8% (for 6-months ended April 30, 2009 – they have an October year-end), but as we shall see, both companies’ net margins are roughly the same and this puts Kingsmen’s performance roughly in line with Pico as far as profits are concerned. It may also indicate that Kingsmen has some room for improvement of their cost structure as Pico is the market leader which has managed to achieve a much higher gross margin.

The bulk of expenses for such event management companies comes from staff costs, as many staff are needed for consultancy, project management and event co-ordination. Staff costs thus makes up 15% of revenues for 9M 2009, but has increased by less (+14.3%) than the increase in revenues of 18.4% (year-on-year). Since staff costs are mainly made up of fixed costs, except for sub-contractors who may be hired on a wage basis or temporary workers on casual wages, the Company should be able to scale up its business without incurring too much overheads in this area, assuming there is tight and proper control over the allocating of human resource and personnel.

In terms of net margin, Kingsmen does not exhibit very high margins. In fact, net margins of around 6-7% are the norm for companies in this industry, as I had also observed Pico’s half-year results and they had margins of just 5.8% even though gross margins were higher. What’s notable is that Kingsmen had managed to raise their net margins from a low of 2.9% in FY 2003 to 7.4% in FY 2008, and current 9M 2009 net margins are at 5.9%. One point I would like to reiterate is that high net margins are not necessarily a sign of good financial statements, as there are still the elements of Balance Sheet and Cash Flow Statement to analyze. For instance, China Fishery had net margins of 20.3% in its latest FY 2009 financial statement release; but its Balance Sheet was in heavy gearing and it had negative free-cash-flows (“FCF”). This is not to say that lower net margins can justify an investment, but taken as a whole, I am willing to consider other factors which affect my investment decision even though this is one aspect of the company which is a “minus”.

Balance Sheet Review and Comments (as at Sep 30, 2009)

As can be seen in the table above, current ratio has remained fairly constant at about 1.30 over the years, and this is also broadly in line with competitors (though a UK-listed competitor had much worse current ratio by comparison). The days receivable started out quite poor at about 156 days back in 2003, but has improved gradually over the years and as at FY 2008 it stood at 79 days. The Company has been in net cash ever since listing in FY 2003, and the Cash Flow analysis will delve into why this is so, and pick up a few salient aspects of Kingsmen’s cash flow management.

Return on equity has been very high considering there has been little debt. ROE started out at 12.5% in FY 2003 and has increased to 33.2% in FY 2008. I would consider any ROE above 20% to be very impressive as the company’s equity base keeps growing, thus maintaining high ROE is not an easy task. ROE is a much better measure than EPS, and I shall be using it for future analyses.

Due to the fact that I had neglected to analyze some key ratios and trends in my previous investment mistakes (namely Ezra and Swiber), I have now included them in the table below. These include growth in revenues versus growth in trade receivables, trade payable days compared to trade receivables average days; as well as the Cash Conversion Cycle. It is known that clients pay an upfront deposit of up to 30% in cash once a contract is sealed, and this acts as a buffer in cases where customers may be slow to pay due to financial difficulties or due to crises like the one just past.


One can observe that the growth in revenues had outpaced the growth in receivables in all years except FY 2007. There is no adequate explanation for this that I can think of, except to postulate that it might be either a timing difference or the fact that Kingsmen had secured larger contracts from FY 2006-FY 2007 period which led to longer credit terms being extended. Whatever the case, this occurred only once in the five years under review, thus I would conclude the growth in receivables is in line with the growth in revenues, and that receivables are managed well. A quick glance at the FY 2008 Annual Report also shows that of the S$41 million trade receivables as at Dec 31, 2008, about S$8 million (20%) are past due but not impaired. An allowance of just S$1.69 million was made for doubtful debts, which constitutes just 4.1% of total trade receivables. Moreover, Kingsmen’s list of clients are also broadly diversified and they do not rely too much on any one event or customer; so this also mitigates the risk of them being bogged down by bad debts should a major customer go bankrupt.

Trade payables, on the other hand, had not increased as much as COGS in the strict sense. COGS had nearly quadrupled since FY 2003 from S$38.6 million to S$132 million but trade payables increased by just 250% from S$11.5 million to about S$28.7 million. Trade Payable days however, was consistently lower than trade receivable days, meaning Kingsmen were paying creditors sooner than they collected money from debtors. The gap was narrowing from FY 2003 till FY 2006 when it suddenly widened to 30 days in FY 2007 due to the spike in Trade Receivables. In FY 2008, the gap was closed when both ratios registered the same number of days (i.e. 79 days). For FY 2009 thus far, there appears to be a gap of –17 days again and I feel part of the reason is because customers are asking for lengthier credit terms as the economy is still weak, and also partly due to the larger contracts secured by Kingsmen.

Part 2 of the analysis shall touch on the Cash Flow Statement, as well as go in depth into the business divisions of Kingsmen.