Thursday, March 25, 2010

Kingsmen Creatives - Analysis of Purchase Part 2

Part 2 of Kingsmen’s analysis shall touch on the Cash Flow Statement analysis and review, as well as the different business divisions of the Group and their clientele and customer base.

Cash Flow Statement Analysis

Looking at Kingsmen’s cash flows, one can see that apart from FY 2003 (listing year), they had managed to generate free cash flows (FCF) every single financial year from FY 2004 to FY 2008. For 9M FY 2009, the presence of negative operating cash inflows was due to the large Universal Studios contract which had a lot of unbilled revenues attached to it. Thus, there was a time lag in billing and receiving the cash, which was why the receivables had climbed significantly in relation to the rise in revenues.

One can also observe that apart from FY 2008 where there was a major acquisition of PPE, working capital requirements in terms of capex are low for Kingsmen’s business and the business is adept at generating excess cash which it then pays out as dividends to shareholders. Starting from FY 2008, Kingsmen had started to pay out 2 dividends per year – interim as well as final.

Business Divisions Summary

Its two main divisions are Museums and Exhibitions, as well as Interiors. Museums and Exhibitions form about 55.3% of their revenues (as at Sep 30, 2009), while Interiors took up about 39.2%. Kingsmen offers a comprehensive range of services for exhibition and events such as design, project management and construction of single and double-storey stands for special events such as roadshows, conferences and sporting events. Some of the contributors to Kingsmen’s revenue include events such as HK Asian Aerospace, Macao Science Centre, Seoul Airshow and Sibos 2009. They also have a S$59.5 million contract with Universal Studios at Resorts World Sentosa to develop the themed façade, and to provide area development works. They are optimistic of clinching the Phase 2 of the Universal Studios contract later in FY 2010.

As for Interiors division, it is in charge of roll-out management, custom fixture manufacturing, warehousing and logistics management for middle to upper-end retail customers. Kingsmen help to design and fit out the interiors for world-renowned brands such as Polo Ralph Lauren, Swarovski, Tag Heuer and Tiffany.

The other two smaller business divisions are Research and Designs, which contributed to 2.4% of revenues, and Integrated Marketing Communications (“IMC”), which contributed to 3% of revenues. IMC is in charge of providing total solutions to clients and boast a comprehensive range of services such as conceptualisation, design, production, project and event management. Basically, these services enhance value for the client and are a result of the expertise and experience which Kingsmen has accrued over the years.

Analysis of Revenues and Margins

From the diagram, it is clear that the bulk of Kingsmen’s revenues are derived from the Museums and Exhibitions (“Museums”) as well as Interiors Divisions. In FY 2003, Museums used to take up just 40% of revenues while Interiors took up 54.5%; but in FY 2008, the ratio has shifted to 47% for Museums and in 9M FY 2009, the ratio is a very high 55%. This shift is partly due to the Universal Studios contract and also the heightened MICE activity in Singapore and South-East Asia of which Kingsmen is actively involved in.

One should also note that revenues have been steadily rising over the years, as Singapore and the South-East Asian region become more and more of a hub for MICE events and also for international brands to set up shop. The boom in Singapore, Hong Kong and China has attracted many luxury brand names to set up retail outlets and boutiques; and this has enlarged the pie for all players in the fittings industry. The volume of MICE events, exhibitions and other major events such as Formula 1 has also increased tremendously as the two Integrated Resorts open their doors in FY 2010; and this will be a permanent platform for the Company to tap on for recurring revenues. In short, Singapore has changed permanently and the market for MICE events is much larger than it used to be.

Looking at net profits, Interiors makes up the larger bulk of net profits as it has a better profit margin than Museums. Interiors usually makes up about 50% of the profits while Museums takes up about 35% to 45%. The quantum of net profits has been steadily increasing as the volume of Kingsmen’s business grows; and it is a business which can scale up easily without incurring too much additional expenses as it is predominantly a services business.

Net profit margins are higher for Interiors division as well, at 11.3% for FY 2008, compared to just 8.1% for Museums. Integrated Marketing Communications is seeing better margins as it helps to provide total solutions to customers who look for innovative marketing ideas.

Business Unit Geographical Analysis

In FY 2003, Singapore made up the bulk of revenues for Kingsmen (72.2%) while Asia (comprising China at the time) took up 7.5%. United States and Canada took up another 8.1%. Now, in FY 2008, Kingmen’s revenues still stem mainly from Singapore but the proportion has fallen to just 40.6%, while a large bulk comes from Greater China at 23%. Europe still contributed about 11.8% to revenues as Kingsmen designs and exports fixtures out to Europe and this has been a booming business for them. The contribution from USA and Canada has shrunk to just 2.1%, while the Middle East is a new growing geographical segment, contributing 4.8% for FY 2008, up from 1.1% in FY 2006 and 3.8% in FY 2007.

From this simple diagram, it can be seen that Kingsmen has slowly but surely extended its reach beyond Singapore. Although Kingsmen is a home-grown company, it has managed to broaden its services to other regions as well in recent years, with more contributions flowing in from Greater China, and also penetrating Dubai in the Middle East. Kingsmen has also set up offices in Korea to take advantage of opportunities there and their plan is to increase their presence in China and India as well as these are emerging economies and the level of Museums, Exhibitions and MICE events is set to grow.

As Kingsmen expands their footprint across the region, I think we can expect to see them moving into new territories in the next few years as their business is easily scalable with minimal increase in working capital.

Part 3 of the analysis will present competitive analysis for Kingsmen, the first time I am including such a feature. It will give a brief summary of competitors Pico Far East (market leader based in Hong Kong), as well as Cityneon (smaller competitor) and Design Studio (A specialist furniture manufacturer which has overlapping Interiors business with Kingsmen). I will also touch on prospects and plans including the upcoming major events in the South-East Asian region, as well as to comment on how the business model of Kingsmen can help sustain revenues and recurrent cash flows which are vital to the business. I will end off with a wrap-up of the merits and demerits and the rationale for the final decision to purchase shares in the Company.


Shud'n said...

when will part 3 be updated? looking forward to it.

Musicwhiz said...

Hi Shud'n,

You may have to wait a while because when I did my analysis for Kingsmen, I made a lot of short notes and they are scattered all over the place. Therefore, I will need time to organize them and clean them up to fit into a blog post. Considering I am pretty busy with work and personal life these few weeks, it may not be ready so soon.

Try checking back in mid-April 2010.