Monday, March 14, 2011

Kingsmen Creatives – FY 2010 Comprehensive Analysis Part 2

Part 2 of my Kingsmen analysis will focus on the segmental discussions, namely on two aspects – divisional revenue and margin analysis using segmental information; as well as segment analysis by geography using information provided by the Company. The segmental analysis and breakdown numbers can be obtained from Note 13 (Additional Information) to be found in Kingsmen’s FY 2010 financial announcement for FY 2010. The other numbers were obtained from my analysis of purchase. Geographical revenue spread can also be obtained from the same note but is presented in a separate table for clarity and ease of discussion and analysis.

Divisional Revenues

Taking a look at the table above, I’d like to first focus on the divisional revenues breakdown. One can see that historically, Kingsmen’s Interiors division has always had the greater share of the revenue pie as compared to Museums & Exhibitions (M&E). M&E division started to catch up during FY 2008 and FY 2009 due to the opening of the IR, and the subsequent mega-contracts from USS, and also the Formula One race. This tipped the balance somewhat, with Interiors and M&E almost having equal share in FY 2008, to M&E taking the lion’s share of revenues for FY 2009 (due to USS contract as previously mentioned). However, for FY 2010, some normalization occurred and the Interiors division once again became the largest revenue contributor at 49.6%, with M&E coming in rather close at 44.7%. The absence of large contracts for M&E division enabled Interiors to catch up in terms of revenue, but there was still enough business for M&E as Asia had many events going on such as Shanghai Expo, YOG, Formula One as well as exhibition projects such as Food and Hotel Asia 2010 and Singapore Airshow 2010, to name a few. Interiors division, I believe, had a boom year due to the many retail fittings done at Marina Bay Sands Shoppes, with Kingsmen helping to fit out more than 30 shops. The good news is that Interiors also helped to fit out boutiques in China as well as India and Vietnam for internationally-renowned clients such as Tiffany and Burberry. Note that many of these clients are repeat customers and Kingsmen stands to benefit from their expansion plans as they roll out retail outlets in key countries like China and Vietnam. Roll-out Management services constitute a large portion of Interiors’ revenue and cements the long-term relationship between Kingsmen and a client, therefore a lot of the “value” in Kingsmen is not just in delivering quality products and finishings, but also in the relationship and network building with these repeat clients. It is noteworthy that the retail export fixtures business is also gaining traction, with more exports being made to USA/Canada; these are all classified under “Interiors” and have the same margins as the fitting out business.

Though Research and Design (R&D) and IMC tend to be smaller contributors to revenue, thee divisions’ revenues have also increased in tandem with the increase in activities for the Group. But their proportional contribution to total revenue remains small and is unlikely to be significant going forward. More will be mentioned on R&D and IMC in a later section on net profit margins.

Net Profit Contribution by Division

The net profit contribution is somewhat more interesting, as it does not follow too closely to revenue contribution proportions by division. Interiors has always been contributing to more of the profit pie, as compared to M&E. Only FY 2009 was an exception as the large USS contract propelled profits at M&E division to S$9.3 million, which was 47% of total profit versus 44.2% for Interiors. Yet if we compare FY 2009 M&E contributed 56.8% to revenues while Interiors contributed just 38.7% to revenues; so this would imply Interiors was more profitable at the margin level as compared to M&E. This phenomenon presented itself once again in FY 2010’s numbers, because even though Interiors only had a marginally higher proportion of revenues compared to M&E, net profit for Interiors took up 57.6% versus 35.8% for M&E. This seems to indicate that Kingsmen would be better off focusing on growing their Interiors division as it is more profitable than M&E, but the flip side of the argument is that M&E contracts are much larger and “prestigious” and so far have also opened up more doors (i.e. customers) for Kingsmen. Scenic and Thematic works, which is grouped under M&E, is a growing segment for the Group as Asia takes centrestage in hosting mega-events and governments spend large amounts of money on theme parks to attract tourists. According to Kingsmen, the initial contract (parcel of work) tends to be the largest but has lower gross margins (<20% for USS due to deployment of more staff and tight deadlines), while future variation orders and refurbishment/overhaul works would be smaller in terms of size and scale but command better gross margins.

Research and Design and IMC

R&D has traditionally only been a minor contributor to the Group’s revenue and net profit, but note that net margins are very high for this small division and revenue will grow along with the growth in Group revenue. IMC, however, was burdened with higher depreciation expenses due to the purchase of a large panel screen worth about S$500,000, and so reported a small net loss for FY 2010. I was assured by the Company that IMC would have been profitable if not for the higher expenses relating to this purchase.

Net Margins by Division

Looking at net margins, it is interesting to note that M&E division usually has lower net margins as compared to Interiors. After discussion with Andrew Cheng of Kingsmen (General Manager), it would seem that both M&E and Interiors actually garner the same net margins, but M&E typically requires more manpower deployment and more intensive preparations, hence the margins are eroded as a result. Interiors had an 8-year average net margin of 6.9%, while M&E’s 8-year average net margin was just 6.5%. If averages do not tell the story, then look at the last 3 years and you can see that Interiors posted better net margins of close to three percentage points better than M&E.

Surprisingly, R&D has traditionally shown very strong margins and FY 2010 was no exception, with net margins touching 21.6%. Since FY 2006, net margins have been very healthy for this division, while the opposite can be said for IMC as net margins are traditionally very thin and are very erratic. As mentioned by Andrew of Kingsmen, IMC had bought a large screen costing about S$500,000 and the depreciation basically wiped out all the profits for IMC division. One point he did mention was that both divisions have to work together to deliver a total solution to the client, hence the reason for not divesting IMC due to weak margins. Even though the two divisions are small contributors to revenues and profits, nevertheless they have a part to play in the overall scheme of things at Kingsmen.

Geographical Breakdown of Revenue

Singapore has traditionally been Kingsmen’s mainstay in terms of geographical revenue spread. The proportion had actually been dipping since listing from a high of 72.2% to 40.6% in FY 2008, then FY 2009 came along and the huge USS contract pushed the proportion up to 60.3%; but I see this as more of a one-off event and will not persist. For FY 2010, the % dropped back to 46.9%, if only because of the large number of store fitting outs they did for Marina Bay Sands Shoppes (about 30+). Otherwise, the trend for Kingsmen (also verified by Andrew) is that they will be relying much less on Singapore for revenues moving forward, and their aim is to focus their attention on North Asia (namely China, Taiwan, India, Hong Kong, Korea and Japan) as these countries have much more opportunities and business potential.

Malaysia’s contribution has also dropped in recent years below the 10% mark. DMG’s report did mention that malls in Malaysia are ready for sprucing up and Kingsmen may see opportunities there for Interiors division. Andrew affirmed this by saying that the life cycle of malls is about 3 to 4 years, and many malls in Malaysia are due for a revamp. Hence, there should be opportunities there for Kingsmen to grab some work.

The region to take note of is China, where revenue contribution started off at 2.8% in FY 2006, and which has jumped by leaps and bounds to 22.8% for FY 2010. Kingsmen reiterated that there is a lot of potential for China market as many international brands are setting up shop there, and many spanking new malls are being built to cater to the nouveau rich and rising middle-class. The economic boom in China has attracted many international brands there and they have the need for roll-out Management services (i.e. co-ordinating simultaneous store openings in various regions of a country, or across different countries). Theme parks are also being planned and China also had recent mega-events such as Shanghai Expo and Beijing Olympic Games. Kingsmen are setting up a facility in Beijing to cater to increased demand (more on this in Part 4.

Fixtures export is also a growing business and Kingsmen mainly export to USA, hence the contribution from USA/Canada is 7.4% for FY 2010, up from 2.2% in FY 2009.

Associated Companies – Comments

Kingsmen had increased its stake in Kingsmen Fairtech in India (additional 15.5% investment completed on May 6, 2010) and also Kingsmen North Asia in China (additional 11.7% to 92.2% in December 2010). This reflects Kingsmen’s confidence in these two countries being growth engines for the Company moving forward, and therefore the Group wishes to recognize greater contributions in terms of % from these two regions. For FY 2011, Kingsmen will be recognizing greater contributions as a result of the stake increases.

Regarding the loss-making associates, Kingsmen Middle East LLC’s poor performance is mainly due to the recent Middle East troubles, and the Middle East contributes only a small portion of revenues to the Group. Kingsmen has offices in Dubai, Abu Dhabi and Qatar. Kingsmen Nikko is also not doing well mainly due to the sputtering Japanese economy. However, things should start to look better for FY 2011 in terms of associates’ contributions.

Part 3 will touch on the industry outlook and I will present news on MICE, Interiors, tourism and some other pertinent trends in order to present an objective view of the industry. Discussions will branch out from there.


Singapore Man Of Leisure said...

Hello MW,

I saw your comments at La Papillion's CBOX today.

I like your blog postings (I am always on the lookout for investing ideas), but it's quite difficult for me to add my comments to pure stock related postings.

I am more absorbing and reflecting after reading your stock postings.

But you are right. We need to receive feedback.

So here is my feedback: Your posting on Kingsmen got fight with some analyst reports. Looking forward to Part 3.

As you have alluded to the industry outlook in Part 3, it may bring interesting discussions on what "other" stocks may benefit from growth of MICE? Benchmarking.

Hotels? Transport? IRs? Restaurants?

XuCloudy said...

Thanks for the insightful information.

Previously i thought Kingsmen owns Knightsbridge media wall, hence the spending of 500k, but i was wrong.

IMHO, Lack of revenue visibility and stable earning is one of the main challenge to value the company.

Cory said...

MW, -VE in musems/exhibits being covered by +VE interior in 2010.

Both represent large in Revenue.

With the clamping down on housing in Singapore and China, will it be bad for 2011 ?

Musicwhiz said...


Thanks very much for the feedback.

Yes, I would think hotels will definitely boom with occupancy rates hitting new highs and revpar increasing as well. As for transport, I am more cautious as the capex needed to expand the rail network and bus fleet may outweigh the increased tourism dollars flowing in.

And for restaurants, they are almost always crowded! The problem is that barriers to entry are very low and most cannot make enough margin to cover their fixed costs, hence I do not like to look at F&B companies in general.


Musicwhiz said...

Hi XuCloudy,

Yeah, you are not wrong to say that there is no "visibility" per se as theirs are all short contracts and fitting outs are also "ad-hoc". But judging from their track record and repeat customers, I'd say it constitutes recurring income for my definition.

Though you are probably right to say that without the visibility, the market probably accords it a lower valuation.


Musicwhiz said...

Hi Cory,

I don't really get your question. Kingsmen does not do Interiors for housing and residential, but for retail outlets and offices/commercial buildings. So why should the clamping of housing (as you alluded to) affect Kingsmen's business?

Hope you can clarify, thanks.