Friday, April 15, 2011

Kingsmen Creatives – FY 2010 Comprehensive Analysis Part 4

Part 4 of my comprehensive analysis touches on Kingsmen’s competitors Cityneon and Pico Far East (“Pico”), where I compare key ratios and numbers to see how they perform with respect to Kingsmen. Note that each company provides services which overlap one another and all three companies may be in the same industry but their core competence is different. I will give a brief introduction to each company, explain their plans and prospects and do a qualitative comparison between their business model and Kingsmen. After this has been done, I will provide a spreadsheet with the numbers and ratios as a way of comparing the three companies. Explanations and analyses will then follow.

Cityneon Holdings Limited

Brief Introduction

Cityneon was formed in 1956 when it was incorporated as Cityneon Electric and started trading domestic electrical appliances. It was not until the early 1970s when Cityneon first entered the professional exhibition services arena when the Company was commissioned by AUSTRADE to stage the first ever solo-country “Made In Australia” trade exhibition in Singapore. This began a series of other projects throughout the 1970’s and into the booming 1980’s which saw Cityneon organizing many events, exhibitions and trade shows. In 1993, a mammoth exhibition was organized in Bahrain entitled “REBUILD KUWAIT” in which Cityneon did so splendidly that a year later in 1994, they set up a permanent base in Bahrain.

In the 1990’s, Cityneon restructured its business operations and formed 4 business divisions, each specializing in a specific core competence. These were Cityneon Exhibition Services (exhibition rental), Cityneon Creations (custom built, high quality pavilions), Cityneon Concepts (event management services) and Cityneon Global Projects (Design and architecture for Interiors). The Group has its offices located in Singapore, Malaysia, China (Shanghai) and the Middle East (Bahrain).

The Company now provides image marketing solutions globally using the right mix of creativity and commercial acumen, including project management and event logistics capabilities (taken from their website http://www.cityneon.net/site/).

Prospects and Plans

According to the Company, FY 2011 will be a “challenging” year because customers from the MICE industry (including USA and Europe) are still recovering from the recession and thus will rein in spending on such activities, except for China and India. Another factor is escalating staff costs which are expected to crimp margins even further, and the Company is trying to extract maximum value per employee dollar as it possibly can. A third and very important factor is that the Group draws a significant percentage of its revenue and profit contribution from the Middle East (see figure below – for FY 2010 this proportion was a high 30.4%) and as a result of the serious unrest in countries like Tunisia, Yemen, Bahrain, Egypt and Libya, this can be expected to significantly impact its operations.


Cityneon’s plans are to target and look for opportunities in China and Vietnam, of which they do not have much of a foothold in. They also plan to target more MICE events at the two new IR and to work on their thematic division for USS Phase II and to bid for more regional theme park projects. Another area which they hope to capitalize on is sports events infrastructure business – and this could serve them well once the Sports Hub is completed in 2015.

Comparisons with Kingsmen and Comments

Cityneon seems to focus more on the MICE (exhibitions), thematic segment and event management, from the breakdown as provided in their FY 2010 financial statements. Thematics was involved with the USS projects and Kingsmen is also similarly involved with a huge parcel of work in FY 2009 for USS. Both companies are involved in Phase II of USS as well and will see some parcels of work coming from there. However, the main difference between the two companies is that Cityneon does not seem to do any Interiors and fitting out at all, while for Kingsmen this is a major revenue contributor. Cityneon completed four pavilions at the recent 2010 Shanghai World Expo and this comprised the bulk of their exhibition services revenue, while Kingsmen also did some work on Shanghai Expo but overall had more breadth in terms of its M&E business division, covering F1 and other major events as well. While Cityneon did also cover major events such as Youth Olympic Games, we will see later on that their revenues are not as high as Kingsmen even though they have a longer track record as a company (Kingsmen was started only in 1976).

In terms of geographical coverage, Kingsmen is more focused on Singapore (home base), China, India, Hong Kong, Japan and Taiwan as compared to Cityneon, which seems to be more focused on Middle East and Singapore. This means Kingsmen’s revenue is more diversified and less prone to country risks (as what Cityneon is facing now). Cityneon also seems to be scrambling to expand their business into China and Vietnam, while Kingsmen already had a foot in these countries several years ago. So what I can conclude is that though Cityneon is stronger in Middle East as compared to Kingsmen (Middle East contributes just 1% of revenues), Kingsmen has more diversified revenue streams and is also already entrenched in countries which show promising signs of long-term growth, such as China and India.

Pico Far East

Brief Introduction

Pico Far East (“Pico”) is one of the world’s leading experiential marketing service providers and is a market leader in the MICE industry. The Company has been in operation for more than 40 years, employs 2,200 staff in its sales offices, operates in 19 countries and has a global network of 34 offices worldwide. Pico was listed on the HKSE in 1992 and its Thai associated company was listed on MAI of Thailand in 2004.

Pico’s four main business segments are:-

1) Exhibition and Event Marketing Services – this accounts for the largest portion of the Group’s revenue at 77.9% for FY 2010 (FY 2009: 82.2%). The division organizes trade shows, provides direct services to MNC and Government Agencies and includes setting up of facilities for corporate events, national celebrations and branding and product promotion events.

2) Museum, themed environment, interior and retail – This segment accounts for 9.7% of Group turnover for FY 2010 (FY 2009: 6.5%). It mainly performs work for museum and theme park projects (similar to M&E thematic sub-division in Kingsmen) and interior and retail fitting out.

3) Brand Signage and Visual Communication – This segment accounted for 9.2% of Group revenue for FY 2010 (FY 2009: 9.0%). This division is involved in street planning, design, renovation and signage production.

4) Conference and Show Management – This is Pico’s smallest segment and accounted for 3.2% of group revenue for FY 2010 (FY 2009: 2.3%).

Prospects and Plans

Pico also contends that the fragile economic recovery may weigh on trading conditions and they are poised to capitalize on new opportunities even if recovery is gradual and slow. They have reduced their exposure to USA and Europe and thus will not be very much affected should these countries see slower than expected growth. A big mention was also made of China, where the Group derives 52.3% of its revenue in FY 2010 (See table above); the size and potential of the market was stressed which is similar to what Kingsmen had declared. However, Pico are focusing more on the exhibitions and events aspect of China, while Kingsmen are stressing more on international brands setting up outlets all over China as part of their expansion plans. The Group also plans to strengthen its position in the Middle East and India.

Comparisons with Kingsmen and Comments

Kingsmen and Pico have overlapping areas of business in the events, exhibitions and thematic/scenic divisions. However, Pico derives a large proportion of its revenues from exhibitions and events management, as compared to Kingsmen where M&E division and Interiors contribute roughly the same proportion to Group revenue. Admittedly, Pico covers a much larger breadth and scope of services when it comes to Exhibitions and Events as compared to Kingsmen, and after speaking to Andrew the General Manager he also mentioned that Pico is in a different league when it comes to bidding for mega-projects. The projects Pico undertake are much larger in scale and complexity and Kingsmen has yet to achieve such a level of proficiency to be able to compete on the same footing, so this is an area which Kingsmen has to work on; by benchmarking to the market leader they can also improve on their own capabilities and competencies. They had recently done so by winning the parcel of work at USS which enabled them to gain experience in managing a thematic/scenic project which Kingsmen had never undertaken before.

However, in the arena of Interiors and Fitting-Out, Kingsmen clearly has an edge and advantage as Pico’s revenue share for this division is less than 10%. Kingsmen has honed their Interiors business into one which includes roll-out Management as well, and their clientele is certainly impressive. Pico cannot boast such a clientele of international brands even though they are very well-entrenched in the exhibitions arena. I guess this is where both companies compete on different footing, and where Kingsmen can really shine as the contractors of choice to handle large, complex Interiors work which smaller companies cannot take on. Since Pico is not a contender for this business division, Kingsmen can go ahead to grow this division in Singapore and China.

Competitive Analysis – Key Ratios and Numbers

Note that I did not compare the historical price-earnings ratio at which the three companies are currently trading at, mainly because their businesses are not exactly similar even though they have some intersections and overlaps, and also because the scale, size and geographic spread of the revenue is also somewhat different, making direct comparisons of PER difficult.

Revenues-wise, it seems apparent that Kingsmen and Pico have a larger revenue base than Cityneon. This is in spite of Cityneon starting up around the same time or even earlier than Kingsmen. If we look at gross margin, however, it is interesting to note that Kingsmen’s gross margins lags behind the other two competitors, who have managed to hit 30+% for FY 2009. This may be just a temporary “blip” though, for gross margins seem to have begun to normalize for FY 2010 as Kingsmen was awarded the huge parcel of work for USS in FY 2009 (and which yielded lower gross margins).

In terms of net profit growth, Pico seems to be the most impressive of the pack with a 55% increase in net profit. Then again, they are doing mostly exhibitions and events and Asia has been booming with these over the last few years. It is therefore surprising that Kingsmen and Cityneon have yet to pick up on this boom and ride the wave to stronger profit growth. One reason could be the “lag” effect – note that Pico’s main revenue source comes from China while for Kingsmen, they are only just starting to recognize higher contributions from this region; while Cityneon has only started making plans to enter China and Vietnam. Assuming China continues to grow and its middle-class segment increases significantly, then the spill-over effects may also boost revenues and net profits for Kingsmen and Cityneon, though the extent of this is debatable as Pico is already an entrenched player. Logically, since Kingsmen is competing more in the area of Interiors rather than Exhibitions and Events, they should be likely to grab a significant slice of the pie.

Another surprising fact was that for net margins, Kingsmen seems to have the highest net margins amongst the three players! FY 2010 saw Kingsmen’s net margins hit 6.4%, while Pico hit 6.2% and Cityneon reported a net margin of 4.9%. This demonstrates good expense control on Kingsmen’s part as compared to peers, even though Part 1 did mention that expenses rose more than gross profits as a result of higher staff and administrative costs. Moving forward, Kingsmen should be able to at least maintain or raise their net profit margin as they move into lower cost countries and take on smaller parcels of work (which require less manpower to be mobilized).

Current ratio-wise, Kingsmen seems to have the worst current ratio among the 3 companies, but the 1.45 is not far from the 1.50 from Pico. Knowing that the business models of all three companies require relatively little working capital and inventory requirements, current ratio is thus not as important as other measures such as cash flow generation and ROE. As long as it does not dip below 1.20 (unless supported with good reasons), I will not get too worried.

Free cash flows for all three companies are healthy, and the fluctuations are mainly due to timing of payment of trade receivables and timing differences. Pico has the highest level of cash flows for FY 2010 but then again, it would greatly depend upon the projects size/type and clientele and credit terms given. Dividend yield is highest for Kingsmen, even if we strip out the 0.5 cent special dividend for FY 2010, at 6.5%. Pico’s dividend is also increasing and for FY 2010, the yield was 6.3% (all based on March 18, 2011 closing prices). It would appear at face value at least that Kingsmen has the greatest value in terms of dividend yield at this time, unless of course Pico continues to increase their dividend for FY 2011 (then again, its share price may rise to decrease the potential yield). For Kingsmen, the share price has not budged much so the yield remains above 6%.

Summary

So it would appear that Kingsmen does have some edge over its competitors, just by purely looking at the numbers alone. In terms of competitive edge and niche positioning, Kingsmen do have an edge in Interiors over Pico and Cityneon; but in the arena of Exhitibions, Museums and Events (i.e. MICE) they face stiff competition from the other two players. More often than not, I see Pico’s banner flying on some event which they had organized, but there is no sign of Kingsmen. I guess Kingsmen can do more to increase their visibility in Singapore and for events, and to create more awareness about what they do and how well they do it. Thus far, I only see their large banner flying on the stands for the Formula One race come September.

For Part 5, I will be looking at qualitative aspects of Kingsmen, and also delve into other pertinent aspects of the Company as a viable investment. Of course, this is all solely my opinion and I may suffer from selective perception as I am vested, so please also do your own research and independent and objective thinking on what I have posted.

2 comments:

I Give Up said...

I'd think (Cash+Marketable Securities+Receivables)/Daily Cash Expenditure would be a better measure of their liquidity... but it really isn't the concern with kingsmen.

I've noticed their staff expense went up (compared to the increase in revenue) this time round...

Musicwhiz said...

Hi I Give Up,

Yes I am also not too worried about the liquidity due to the nature of the business.

Staff Expenses did go up and this can be attributed to more staffing for scenic/thematic projects as well as business expansion in China.

Cheers,
Musicwhiz