Thursday, May 27, 2010

Kingsmen Creatives – 1Q FY 2010 Analysis and Commentary

The reason for this review and analysis is because I had not done one for Kingsmen’s FY 2009 results, as I was busy preparing my Analysis of Purchase (which was posted up in 3 parts). Furthermore, there were also some items within “Other Income” which I felt had to be adjusted to get a better picture of Kingsmen’s true performance, so I have prepared a spreadsheet showing the differences (you can view this later in the Income Statement Analysis section). This review is not meant to be very comprehensive and simply serves to highlight salient areas which I feel deserve mention; as an investor I have to look out for red flags as well as positive areas, so as to obtain some measure of assurance that I still have my requisite margin of safety.

Profit & Loss Analysis


As can be seen in the above table, I have plotted Kingsmen’s original Profit and Loss Statement, and at the side I have shown another Income Statement but removed the one-off items which are found in “Other Income”. I have also normalized the tax expense to be in line with the adjusted profit figure in terms of % increase in Profit Before Tax (“PBT”) of 55.4%; these lines are highlighted in grey. It can be clearly seen that when adjusted as such, PBT is actually 55% higher year on year due to one-off items such as bad debts recovered, foreign exchange gain and jobs credit (all highlighted in orange in the table below the Income Statement). 1Q being the traditionally slower quarter, this table shows that for 1Q 2009 Kingsmen actually only earned about S$1.5 million if the one-off items are removed; hence for 1Q 2010 they did significantly better as net profit on a comparative basis would have improved 55% while revenues only increased by 30.8%. This, I feel, is more reflective of the true situation as one should notice that staff costs only increased by 16.1% and other expenses by 9.2%, all lower than the increase in gross profit of 27.6%.

Depreciation expenses decreased and so did Finance costs, but Finance costs are set to jump after Kingsmen took on a S$4 million loan to purchase two factories units in Selangor, Malaysia. Gross profit margin held more or less steady at 26.3% versus 26.9% in the previous year, but once the larger projects are over and done with we should see gross margins improving somewhat. 4Q 2009 was dismal as the bulk of the USS revenues were recognized, and along with it came weaker margins.

Overall, net margin has fallen to just 4.9% for 1Q 2010, not a very positive sign admittedly; but since this is their weakest quarter it will not be fair to judge the entire’s year’s performance based on this one quarter (note that net margin was 6.2% for FY 2009, down from a high of 7.4% for FY 2008).

Balance Sheet Review

Instead of reproducing the entire Balance Sheet with variance analysis (which I felt was a waste of time since readers can access the relevant doc on SGXNet anyway), I think it would suffice for me to just give a simple commentary on the Balance Sheet, which appears much stronger than the Income Statement, thankfully!

PPE had gone up due to the acquisition of two factory units as mentioned earlier, up by about S$4.5 million. Notice that the loans taken up amounted to about S$4 million, so I suspect some cash was paid out as down payment for these units while the rest was bank-loan financed. A quick check at the cash flow statement shows that I was right – S$4.8 million was spent buying the assets while just S$4 million worth of bank loans were taken up. This is a long-term loan so it is not an immediate worry for Kingsmen; anyway they have more than enough cash to repay the loan anytime.

Trade Receivables fell by about S$21 million, reflecting collections from USS which showed up as a timing difference in FY 2009’s financial statements, and which resulted in FY 2009’s operating cash inflow falling to just S$1 million plus. However, there were also significant payments made to Trade and Other Creditors to the tune of about S$17 million, so there was an offsetting effect which will be seen later in the Cash Flow Analysis. This is a positive sign as Receivables are dropping even though revenue is up year-on-year, though the timing is not exact as these receivables are as at Dec 31, 2009 whereas the basis for comparison for Income Statement is 1Q 2009. Still, it helps to see that Receivables are not building up excessively, which could indicate a likely impairment.

Cash has gone up slightly from S$22.8 million to S$28.1 million, which is another positive sign. Borrowings remain low at about S$5 million, so net cash stash for Kingsmen is about S$23.1 million, implying net cash per share of about 12.22 cents.

Cash Flow Statement Analysis

Now we come to the all-important cash flow statement, which represents the life blood of the company and from which dividends flow from. Kingsmen’s 1Q 2010 showed a stronger operating cash flow as compared with 1Q 2009, with an inflow of S$6.4 million against an outflow of S$2.3 million. The main reason was the large inflow arising from the decrease in trade receivables, but which was offset somewhat by the cash outflows arising from payments to trade and other creditors. Purchase of PPE took up S$4.8 million worth of investing cash flows, so there was still free cash flows generated of about S$1.6 million. Moving forward, as Kingsmen begins to collect more on USS (due to variation orders) and other clients, cash flows should improve significantly and hopefully by year-end, it will show the same strong performance as FY 2008 (which saw operating cash inflows of S$25.7 million against capex of just S$11.2 million).

Cash flows from Financing mainly came from bank loans, as there were no dividends paid out in the 1Q of the year (they are usually paid out in the 2Q after the approval at the AGM, and received in late May; FY 2009’s final dividend of 2 cents/share was received on May 19, 2010).

This concludes my short and sweet review for Kingsmen’s 1Q 2010 results. For the commentary on prospects, I think the financial review and MD&A will suffice. For now, I am hinging on the revamp of Orchard Road and the rise of heartland malls to provide more business for Kingsmen’s interiors fitting out division, while more MICE events should stream into Singapore as a result of the opening of the two IR. There is also a chance of Kingsmen clinching scenic and thematic works due to their experience with USS, so that is a wild card which hopefully can become reality.

Incidentally, I took the opportunity to load up on more Kingsmen shares as a result of Mr. Market acting manic-depressive. Purchases were made on May 6 at 57.5 cents, May 7 at 56.5 cents, May 19 at 56 cents, May 21 at 52.75 cents and May 25 at 50 cents. A total of about S$25K was pumped in and my new average cost (which will be reflected in the portfolio review) is 56.0 cents. Total portfolio cost has not increased to S$175K.

Below is a photo I took (not very professionally, sadly) of one of the shops which Kingsmen is fitting out at Marina Bay Sands. It's a Korean shop called iRoo.


33 comments:

kanglc said...

Once again, thanks for your posting!

donmihaihai said...

Coming up with adjusted profit for one quarter results?

Impressive for time spent and good job done. Not that so for whatever reasons behind it.

Mr. Market acting manic-depressive for a stock that is trading at about 2X NBV?

Cheap and fair.... Ya, likely but manic-depressive...

Musicwhiz said...

Hi kanglc,

You are most welcome!

Regards,
Musicwhiz

Musicwhiz said...

Hi Donmihaihai,

Perhaps it's really time you learnt to be polite, and phrase your questions and comments with proper decorum. It's not pleasant at all to constantly received thinly-veiled sarcastic remarks; and your previous comment on traders versus investors even yielded a "blockhead" remark, which was uncalled for.

As investors, let's discuss issues amicably and professionally, if you please.

Lest you think that just by looking at NAV, it can solve everything, I would like to point out that in a service business like Kingsmen, most of their expertise and assets are in the staff and human resources that the company employs; and as you should know this is NOT quantifiable on the Balance Sheet. Hence, Kingsmen has a low net tangible asset value as most of their assets are brand equity, staff expertise, knowledge and competence. Most accounting textbooks will explain how humans cannot be properly valued in the Balance Sheet, yet contribute much of the quality and work which cmopanies provide to clients and customers. You could do well to mull over that.

Once again, I remind you to be civil. I will not hesitate to delete comments which are sarcastic or plainly insulting in future.

Thanks,
Musicwhiz

Shud'n said...

Musicwhiz, great analysis! Keep it up and do keep on posting such great stuff!

Musicwhiz said...

Hi Shud'n,

Thank you too for visiting, and have a great weekend!

Regards,
Musicwhiz

donmihaihai said...
This comment has been removed by a blog administrator.
Musicwhiz said...

Written by Donmihaihai:-

Well the relationship between NBV and ROE is always there. So unless a company is generating sky high ROE with little capital requirement, then NBV can be throw out of the window.

No matter how I look at Kingmen, it is generating good return but not sky high which mean it required a meaningful amount of capital(not huge) to generate earnings.


In accounting, earnings, ROE and equity(which included retained earnings)are interlink. Services quality, intangible assets or whatever can't be measure precisely but contribute to earnings which goes right to earnings, to equity and to ROE.

So why can't Kingmen being valued using NBV? And by my earlier saying that Kingmen is likely to be cheap at 2X NBV, I am already looking at future profit because of Kingmen profitability.

[b]I thought I was commenting on something written by someone who has good knowledge on accounting and business but I guess I was wrong.[/b]

--------------------

As can be seen, the comment above constitutes a blatant insult, that's why it was deleted! Can't you make your point without insulting someone's intelligence? It really pays to be a much nicer person in life, because there's no good being done in going around pissing people off. If you had just stated the facts and arguments, I will handle the questions and give you your answers.

So since you really want answers, perhaps I can ask you - if a business is generating consistent earnings and cash inflows, why should it be valued based on NBV (or liquidation value)? Liquidation value is simply the sum total of all assets at book value, and does not take into account future earnings.

A company is valued (in cases where earnings matter and can be consistently measured) using price-earnings, or even DCF if the cash flow stream is consistent enough. Hence, constantly referring to NBV or NAV is valuing a company makes no sense unless you wish to have a fire-sale of assets tomorrow. Or unless you can show that it contributes no future earnings or cash inflows.

Regards,
Musicwhiz

Musicwhiz said...

Just for the record, below is a list of ROE% generated by Kingsmen over the last 5 years:-

FY 2005 - 14.9%
FY 2006 - 26.7%
FY 2007 - 26.2%
FY 2008 - 33.2%
FY 2009 - 28.7%

With the numbers above, I fail to see how one can conclude that ROE is not high, considering the company is in a net cash position and has very little debt.

As for cash flows, the FCF generation ability of the company is as follows over the last 5 years:-

FY 2005 - S$4.2 million
FY 2006 - S$7.8 million
FY 2007 - S$12.0 million
FY 2008 - S$14.6 million
FY 2009 - S$0.19 million*
1Q 2010 - S$1.6 million

*FY 2009's low FCF was, as mentioned, due to the timing difference in collection from USS contract, which was concluded in 4Q 2009.

Even up till 1Q 2010, FCF was still generated by Kingsmen with very low capital expenditure requirements.

Musicwhiz

Mr ICICI said...

....i think there r some ppl who can't take it when they see other ppl's stock portfolio doing way better than their own. this is especially so when these ppl view their stock investment method as THE way to invest in stocks, and see investment methods employed by other ppl as incorrect or inferior.

ive seen a lot of this cases b4. ive known of ppl who thinks a particular company as lousy and overpriced, and yet the share price continues to go up 4-5x, making a lot of ppl rich, but except themselves.

on the contrary, the companies that they think are undervalued and superb and which they have invested heavily, are only seeing mediocre share price performance. and they will wait for yrs and yrs and yrs holding on to the stock for the stock market to realise the 'true value' of the company.....and the stock market never seem to acknowledge this intrinsic value that they attached to the particular company!

there's a lot of frustration and angst for these particular grp of ppl...it's very understandable...

donmihaihai said...

ROE
FY 2005 - 14.9%
FY 2006 - 26.7%
FY 2007 - 26.2%
FY 2008 - 33.2%
FY 2009 - 28.7%

Average = 25.94%

Buy at NBV - return = 25.94%
buy at 2X NBV - return = 12.97%
buy at 3X NBV - return = 8.65%

It make no diff whether cash is being taken out or not as NBV will change according while purchasing price doesn't.

I believe that yours old accounting text will say NBV or B/S is the financial resource or financial position of the company at that point of time.

Who say it is about liquidation value only? And If I need to use 2 reply to get this through, it is either I am not good at explaining(which is)or you don't understand it. I will get @!#$ for writing this but well it is true.

My calculation
FY, ROE, net cash, equity

FY2003, 12.36%, 3,938K, 12,767K
FY2004, 11.46%, 3,360K, 13,793K
FY2005, 15.21%, 2,904K, 15,538K
FY2006, 24.44%, 11,446K, 19,161K
FY2007, 27.39%, 19,826K, 37,395K
FY2008, 33.99%, 26,713K, 45,420K
FY2009, 28.64%, 21,536K, 54,871K

What we can see from above is there was a change of fortune in FY2006 where ROE jumped by 10% while cash increased sharply. If we extrapolate FY2003 to FY2005 backward, the conclusion is going to be Kingsmen ROE was at 10 to 15% range before FY2003. Cash was likely for working capital.

From FY2006 to FY2009, there were extra cash. Take away some for working capital and left say half of total equity, Kingsmen was generating with half of its equity. ROE doubled. 50 to 60%.

Of all thing, I have not take Goodwill out which was about 5 million.

ROE at 50 to 60% range is of course very good. ROE at 10 to 15% is reasonable profitable. One can choose to see the 50 to 60% range but it is the same company anyway. The math say if ROE dropped from 60% to 15%, profit dropped by 75%.

I choose to see it as a whole, which is why I said,

“No matter how I look at Kingmen, it is generating good return but not sky high which mean it required a meaningful amount of capital(not huge) to generate earnings.”

Good return, sky high return and high return. Choosing the wrong words means make or break a person day?

Lastly is what I think is sky high return. ARA Asset Management is an example. Its FY2009 ROE was 38%. But most of their assets are used for other purposed rather than generating operating profits. In short its ROE is anywhere above 100%. Next this same B/S(without the extras) can generated a 100% increased in profit or much more without putting in anymore capital.

Kingsmen can’t. A 100% increase, required a meaningful increased in working capital, fixed assets, etc. But is Kingsmen generating good return? Yes. Sky high return? Yes if ROE continue to stay at 50 to 60% range.

donmihaihai said...

just in case so this will be my last try.

"Mr. Market acting manic-depressive for a stock that is trading at about 2X NBV?"


"So why can't Kingmen being valued using NBV? And by my earlier saying that Kingmen is likely to be cheap at 2X NBV, I am already looking at future profit because of Kingmen profitability. "

Let say Kingsmen get back a dollar for a dollar of assets in liquidation. Buying at 2X NBV is over paying by 100%.

Saying it is likely to be cheap or fair, it is about future profit and profitability. No body will pay for company going for liquidation at 2X NBV.

Example
NBV = 54 million
2XNBV = 108 million
54 million(NBV) - profit earned or capital put in.
55 to 108 million - future profit.

I guess it is reasonable to know that for future profit, it is about earnings, which is about ROE which link back to

ROE
FY 2005 - 14.9%
FY 2006 - 26.7%
FY 2007 - 26.2%
FY 2008 - 33.2%
FY 2009 - 28.7%

Average = 25.94%

Buy at NBV - return = 25.94%
buy at 2X NBV - return = 12.97%
buy at 3X NBV - return = 8.65%

If this reply can't do the job, then too bad

Musicwhiz said...

Hi Donmihaihai,

Trust me on this – no one is going to lambast you if you type out your argument in a civil, cordial manner. The problem is your comments usually drip with some form of sarcasm and either insinuate that people are not intelligent, or that they are very ignorant. These comments are uncalled for since they make you seem arrogant (you know more accounting), nasty (you have an axe to grind) and a troll (trying to elicit emotional responses). Even if you are a much better and more knowledgeable investor, it worth your while to be humble and polite as there’s always more you can learn!

To be honest, I don’t fully understand your argument and it could be because you didn’t explain it well enough, or if you would like, just label me dumb and stupid.

Anyway to tackle your argument point by point, I have summarized it as follows:-

1) Why does ROE “drop” when one buys at higher NBV (I assume you mean NAV)? As I previously mentioned, in a services business like Kingsmen, much of the assets are human assets and expertise which cannot be quantified on a Balance Sheet. Hence, the “asset” side of the Balance Sheet may not show this latent potential and talent in the staff in providing such services and quality. Hence, the reported NAV is of course going to be much lower than the “intrinsic” NAV if you factor in the human resource. Please explain to me why ROE should be lower just because one buys at higher NAV?

2) I know my accounting well enough, thank you. NAV does simply represent the net financial position of a company at a point in time. This represents the net asset value which can be recovered in the event of an orderly (note the word) liquidation of the company. For assets such as inventory or fixed assets, they may not always fetch book value especially in a fire sale. Do take note of this point.

3) Just a quick recap of Kingsmen’s capex requirements over the years:-

FY 2003 – S$610K (listing year)
FY 2004 – S$490K
FY 2005 – S$1.4 million
FY 2006 – S$1.2 million
FY 2007 – S$766K
FY 2008 – S$11.2 million*
FY 2009 – S$1.4 million
1Q 2010 – S$4.8 million

*Note: FY 2008 saw a large capex figure due to increase in exhibition fixtures, presumably because of the boost to business in Exhibitions and Museums division. Note revenues had jumped 30% from FY 2007 to FY 2008 (year-on-year).

If we look at this trend, the capex requirements had always been minimal except for FY 2008 which was an anomalous year. Even for 1Q 2010, the capex of S$4 million was largely due to the acquisition of 2 factory units in Selangor using a bank loan. Thus I fail to understand your assertion that it requires a “meaningful amount of capital” to generate earnings.

4) I do not understand your point about “taking away some cash for working capital and left say half of total equity”. Kingsmen was generating positive free cash flow for each of the financial years, and working capital was already factored into the computation, in order to achieve full year net profit. Therefore, you cannot just remove it to justify any conclusions you may wish to come up with. At the same time, I also do not know how you derived the ROE figure of 50-60%, but I would say such numbers are NOT sustainable over the long-term.

Continued in next comment.....

Musicwhiz said...

5) You also mentioned that there was a “change in fortune” in FY 2006 which caused ROE to almost double, and henceforth it had remained above 20% consistently for the last 4 years. So perhaps you may care to ask yourself what were the circumstances surrounding such a persistent increase in both cash reserves and ROE? Note that this was NOT a one-off affair in terms of cash boost and ROE increase.

6) Comparing Kingsmen with ARA (Asset Management) is like comparing apples to oranges. They are from different industries (ARA is a property management company) and hence would of course operate very differently. In such cases, I might as well point to a commodity business like steel and conclude the ROE for such an industry sucks. I also do not understand your “back of the envelope” computation of ARA’s ROE. First you mention that FY 2009’s ROE was 38%, then move on to say its “ROE is anywhere above 100%”, without giving numbers and facts to bolster your case. Are you implying such a business can generate >100% ROE consistently in the next few years; and all without additional significant capex? Then it has to be one of the most wonderful businesses listed on the SGX, for even the blue chips cannot match such an amazing return!

7) For Kingsmen, I am not looking at ROE of 50-60% (i.e. exceptional), but more of the above-average flavour (i.e. above 20% less than 30%) consistently over time. For any business to generate that without significant leverage is already an achievement in itself. Please have a look at Boustead too, which has net cash of S$199 million but ROE of 20.2% for FY 2010. This is a business which does require quite a bit of upfront capex especially for their real estate solutions business. I would think Kingsmen’s capex and working capital requirements are much less due to the nature of their business model and industry.

8) I note you seem to enjoy using NAV to justify the purchase of investments, but I view NAV as simply a cushion in case the company encounters financial difficulties and needs to be wound up. And you always claim that I “over-pay” as I paid much more than book value for an investment. However, let me make my point very clear. A business is more than just paying for net assets of a company; it’s about relationships, networks, service quality, brand equity and a host of other intangible and qualitative aspects which make up the totality of a company; thus I wish to reiterate that I feel I have paid a FAIR PRICE for a good company, rather than paying too much for a mediocre company. The price paid should be based on the future earnings potential of the company (based on the history of 34 years of never suffering a loss), and if one chooses to use cash flows, then an appropriate DCF analysis should be done to ascertain the future cash flow potential of the company into perpetuity. Using NAV does not seem appropriate to value such a company. It is NOT an asset play as defined by Peter Lynch, hence I stand by my facts and data and my view that I did not over-pay for my purchase.

Thanks,
Musicwhiz

donmihaihai said...

ROE

net income/sales X sales/total assets X total assets/ shareholder equity

= net income / shareholder equity.

shareholder equity = NBV = NAV = NTA for simplicity.

NBV = 54 million
Net income = 15 million
ROE = 27.78%
If I buy this company at 54 million(NBV) my return for one year is 27.78%.
If I buy this company at 108 million(2XNBV) my return for one year is 13.89%.

This 27.78% and 13.89% is also earning yields, inverse of PE. Which mean, we get price and earnings again.

As the whole thing show, it doesn't matter where we start, earnings or NBV, the end result is the same.

Forget about buy low sell high. The above(27.78% and 13.89%) will be true when I buy a company.

NBV = 54 million
Net income = 15 million
ROE = 27.78%
purchase price = 54 million
purchase price = 108 million

return under purchase price of 54 million = 27.78% = ROE.
return under purchase price of 108 million = 13.89% = ROE/2.

When I owned this company, my return will not be greater than ROE and my purchase price.

* Look at the 1st equation for ROE again. We get income and margins.

For all the talk about things that doesn't capture in B/S which doesn't capture in NBV, well it will be showned in income and margins and it goes back to the circle again.

And if it doesn shown in income and margins, all the talk about intangible doesn't stand because it is not producing income.

Donmihaihai says politely, "Please know your stuffs better."

donmihaihai said...

Just in case the whole thing just keep coming back to NBV.

I used NBV in all replies. But let not forget that I used 2X NBV for valuation part in Kingsmen. Nobody is going to look at liquidation at 2X NBV.

Musicwhiz said...

Hi Donmihaihai,

Interestingly, for all your talk about NBV and to demonstrate returns (i.e. ROE), you forgot that earnings are necessarily a function of the future and that one's investment gets more valuable as the company generates more earnings. What I mean is that you are simply taking a static number (i.e. NBV at a point in time for Kingsmen March 31, 2010) and my purchase price and saying ROE is XX% based on that. But when investing, we take a forward-looking approach and the historical NBV and ROE is something which serves as a guide to the future rather than the basis for measuring if a company is bought "cheap" or "expensive".

So I say politely to you: "Please understand investing better - it is about the future income, profits and cash flow which can be produced and accrued back to the shareholder, and a shareholder's returns is not STATIC and based forever on a static ROE and measured by the purchase price cum NBV at a point in time".

In your claim, you assume that "all intangibles will eventually flow back to earnings, profits and margins"; which is correct! But all this takes TIME, which is a necessary function of building a business. Why buy a business at a particular price when one can buy it cheaper? Well one reason is because the price may offer a fair deal for good future prospects, and because the dividend yield is higher than inflation; the business is well-managed by competent management (with integrity) and the business model can easily scale up and generate good free cash flows.

I would prefer to hear you comment on the qualitative aspects instead of being insistent on your linking of NBV, ROE and Purchase Price. We don't buy companies for their past, we buy them for their future!

Intangibles are what forms the core brand value of a company, and enhances its reputation and standing in order for it to clinch contracts and retain customers.

I notice you do a lot of quantitative analysis and number-crunching on your blog. I applaud you for the in-depth drilling. But what of the other aspects of the company? Should they not deserve mention and do they not add value to your investment?

Think about it, and reply me if you have an epiphany.

Otherwise, as you said, this roundabout talk about NBV and ROE is also driving me a little nuts.

Cheers,
Musicwhiz

P.S. - Precisely, no one is going to look at liquidation value at 2X NAV because no one has any intention to liquidate Kingsmen in the first place! Please read up on other methods of valuation such as PER and DCF. There is more than 1 road which leads to Rome.

donmihaihai said...

Please Musicwhiz, go ahead and add in growth, add in incremental profitability thru all the intangaible assets that already in or not yet in. Showing that a dollar of retained profit created more than a dollar of earnings. No one is stopping you.

I am not a forecaster, neither do I want to do a good prediction of Kingsmen. What I have shown is it is prefectly alright to use NBV to value a company. Which strangely I have to use reply after reply to get it thru.

Even with with growth and all kind of incremental profitability, these whole thing still stand. Nothing is going to change it.

donmihaihai said...

Don't put words into my mouth.

I have never talk about liquidation in the 1st place. I said NBV and this was what you wrote.

"So since you really want answers, perhaps I can ask you - if a business is generating consistent earnings and cash inflows, why should it be valued based on NBV (or liquidation value)? Liquidation value is simply the sum total of all assets at book value, and does not take into account future earnings.

A company is valued (in cases where earnings matter and can be consistently measured) using price-earnings, or even DCF if the cash flow stream is consistent enough. Hence, constantly referring to NBV or NAV is valuing a company makes no sense unless you wish to have a fire-sale of assets tomorrow. Or unless you can show that it contributes no future earnings or cash inflows."

donmihaihai said...

I think there is something I have not been VERY CLEAR.

I have not make a valuation call or doing any valuation for Kingsmen for all these comments. The closest I made was on the 1st reply. ---- Kingsmen is likely to be cheap and fair at 2X NBV.

The rest for example:
"Buy at NBV - return = 25.94%
buy at 2X NBV - return = 12.97%
buy at 3X NBV - return = 8.65%"

Is to show using NBV to value a company.

In case you have not noticed, for all past comments on this blog and and comments on other places, I have seldom, if not close to never do a proper valuation on any company.

So STOP treating it as I am doing one and give all kind of replies relating to it.

Musicwhiz said...

Hmm Donmihaihai,

It surprises me that you need to type 3 comments just to get 1 point across. Essentially you are trying to say it is OK to use NAV to value a company. I never disputed this. What I am saying is why use NAV to value Kingsmen Creatives, that's all. Go ahead and use NAV to value companies, especially asset plays or those companies which have a higher NAV than their traded market price. That will definitely give you a margin of safety, for sure!

But you have to accept the fact that there are other methods of valuation, for which you don't even seem to acknowledge even though you have replied time and again in this comments box......

If you keep talking about NBV (NAV), then I assume you implied liquidation value. Why? Because NAV is applicable if you wish to liquidate a company to see what you can get from it in order to pay back creditors and shareholders. So I don't see anything wrong with associating NBV with liquidation value. I am not putting any words in your mouth - the words came from MY mouth. Haha.

True, you are not valuing Kingsmen, and I think anyone would be hard pressed to truly come up with an intrinsic value for Kingsmen, including myself! I am merely trying to tell you that if you wish to value a company, you can go ahead and use NAV (which I feel is irrelevant in Kingsmen's case), or PER, or DCF. Whether you choose to or not, I leave it to you.

Musicwhiz

donmihaihai said...

"If you keep talking about NBV (NAV), then I assume you implied liquidation value. Why? Because NAV is applicable if you wish to liquidate a company to see what you can get from it in order to pay back creditors and shareholders. So I don't see anything wrong with associating NBV with liquidation value. I am not putting any words in your mouth - the words came from MY mouth. Haha."

"I know my accounting well enough, thank you. NAV does simply represent the net financial position of a company at a point in time. This represents the net asset value which can be recovered in the event of an orderly (note the word) liquidation of the company. For assets such as inventory or fixed assets, they may not always fetch book value especially in a fire sale. Do take note of this point."

Look at what you wrote and think back again. The point is don't assume if you cannot see thru.

"I am merely trying to tell you that if you wish to value a company, you can go ahead and use NAV (which I feel is irrelevant in Kingsmen's case), or PER, or DCF. Whether you choose to or not, I leave it to you."

and

"P.S. - Precisely, no one is going to look at liquidation value at 2X NAV because no one has any intention to liquidate Kingsmen in the first place! Please read up on other methods of valuation such as PER and DCF. There is more than 1 road which leads to Rome."

Before everything goes back to NBV again, I must remain you that in my example on why it is prefectly already to use NBV. There are 1)NBV method, 2) ROE method, 3) PER, 4) earnings yields. Lastly, for any great predictor, growth can be incorporated as well. But I am very sorry that methods like PEG, CAPAM or even a standard DCF are out.

So my example actually already answered your question mark.

"But you have to accept the fact that there are other methods of valuation, for which you don't even seem to acknowledge even though you have replied time and again in this comments box......"

Musicwhiz said...

Dear Donmihaihai,

No need to quote all my comments thus far - I think I can recall what I've said throughout this whole weekend, thanks.

As it is, you've stated that you acknowledge that there are other methods of valuations. However, after all the roundabout, I still am not able to understand why other methods are not suitable for Kingsmen, while NBV is applicable. Like I said, either I am dumb or you are not explaining clearly enough.

If you like, we can leave it at that. Or if you wish to (try to) explain further, you can always go ahead. No harm trying to drum the same point over and over again, but do note one gets tired after a while!

Cheers,
Musicwhiz

donmihaihai said...

"No need to quote all my comments thus far - I think I can recall what I've said throughout this whole weekend, thanks."

I was afraid that you might forgot about yours earlier comments and start having contridicting comments. But I guess I worried too much......

Cheer up and enjoy the week ahead after a tiring long weekend.

Musicwhiz said...

Haha Donmihaihai,

Sure, thanks I will enjoy the week ahead but most of the weekend is over as I type this!

And bro, you did make me think long and hard over this issue. So I take it as a lesson learnt.

Cheers and take care,
Musicwhiz

la papillion said...

Hi mw,

I really think you're the only one patient to run through the nasty comments in here. I can't be bothered with noisy idiots these days.

Have a good week ahead bro :)

AK71 said...

Hi MW and donmihaihai,

This is probably the heaviest exchange of comments I have ever read. I am not accounting trained and what little accounting I know is from an Adv. Dip. in business admin. course I took 15 years ago.

Reading your comments, I got a bit lost here and there but I think I picked up some nuggets. ;)

Thanks for sacrificing your weekends to produce this exchange. :)

Musicwhiz said...

Hi La Papillion,

Thanks for the encouragement!

Regards,
Musicwhiz

Musicwhiz said...

Hi AK71,

Glad that the exchange was educational for you, haha!

Cheers,
Musicwhiz

SY said...

Hi there,

Was just wondering if you knew that Kingsmen had rather questionable right issues below market price twice (for working capital needs) even though they obvoiusly dont need one given their cash hoard.

I totally agree that this is a very good business (high and consistent returns, low capital intensity) and I was thinking of buying it until i read about the rights issue which was not even discussed on the annual report.

Musicwhiz said...

Hi SY,

Would advise you to check on the facts first before you post here that Kingsmen had two rights issues. For your info, I had done my background checks as a result of your comments and these were my findings (yes, I trawled through Annual Reports from FY 2004 onwards and all Kingsmen announcements relating to share capital):-

Kingsmen started out with 100 million issued shares in FY 2004. In FY 2004, 1,093,690 shares were issued via a placement (not rights) at $0.21 to acquire Kingsmen Indochina Pte Ltd. This brought their issued share capital to 101,093,690 by the end of FY 2004.

In FY 2007, there was a placement (again, NOT rights) done at $0.438 of 20 million shares to raise about S$8.76 million. In addition, there were 2,495,082 shares placed at $.054 to acquire an additional 30% stake in Kingsmen (North Asia) Limited. This brought total issued shares to about 126,473,772.

Finally, in FY 2008, there was a 3-for-2 share split to enable Kingsmen to adhere to requirements to transfer of listing to Main Board, and an additional 63,236,886 shares were issued. During FY 2008, there were also some share buy-backs.

From the info above, I cannot see any evidence of rights issues at all. There were 3 placements in total - 2 were for acquiring companies and 1 was for general working capital. But in no way during the last 6 financial years was shareholders "forced" to cough up more money to pump into the company.

Thanks,
Musicwhiz

wee said...

Musicwhiz,

I like the rigorousness of of your analysis -- although i may not always agree -- but to quote warren buffett "you should be able to, in most instances, summarise a good investment idea in one paragraph". Doing a 3 part analysis for a quarter's results is, in my most humble opinion, an overkill. How about an opening paragraph summarising your reason for buying or holding?

Cheers

Wee

Musicwhiz said...

Hi Wee,

Erm, think you might be mistaken. I did a 3-part analysis on my reasons for purchase, and not for the 1Q 2010 results. In fact, just one posting was enough to summarize most of my thoughts for 1Q 2010.

But you are right to quote WB on that - however I must caution that the man can sometimes make things seem simpler than they actually are! In fact, I think the man does a lot of computations in his head first before he picks up the phone and makes a deal, so indeed he makes the difficult seem simple.

In my case, the reason for the rigorous analysis is to cover all bases, and not to complicate matters.

And I certainly hope it has not been an overkill, either. Haha!

Regards,
Musicwhiz