Kingsmen Creatives – FY 2010 AGM Highlights

I attended Kingsmen’s (“KC”) AGM held on April 27, 2011 11:00 a.m. at their premises at Changi. It was my first time going to KC’s HQ and it was going to be a very interesting day indeed, not just for the amount of information gleaned but also in terms of meeting and interacting with Management and shareholders; as well as getting an unexpected tour around the premises. Below is a photo of KC’s façade and also the Humpty Dumpty statue:-

This AGM review will discuss and cover various aspects of the Company, and I have organized my discussions and questions to Andrew Cheng (General Manager of KC) as well as information obtained from Mr. Benedict Soh and Mr. Simon Ong (founders of KC) into pertinent sections for easy reading and reference. I shall try to cover most aspects of the Company which I felt curious about, and also hope to discuss some other issues which are related to the Company’s prospects, financial performance, margins and potential hurdles, obstacles and liabilities moving forward.

1) IMC Division

IMC division suffered a net loss due to the following events: Bankruptcy of an advertising firm which Kingsmen had been working with, thus write off of amount owing to bad debts; purchase of a large panel for display purpose, of which depreciation recognized was sufficient to wipe out profits for the division.

However, IMC division has good potential for growth as many enquiries are flowing in for alternative media and marketing ideas.

2) Staff Retention Policies (for designers)The CEO said that it was important for him to identify top talent and to take measures to retain this talent. He mentioned that one of GE’s ex-CEOs spent nearly 50% of his time just identifying and retaining talent within his Company. Some of the measures undertaken to retain good talent include:-

a) Pegging designer’s commissions and bonuses to metrics and KPI such as net profit and profit margin. This is across the board for designers from the entire Kingsmen group,

b) Organizing an internal Kingsmen Designer’s Competition once a year to pit designers’ skills against one another in order to stimulate creativity and keep the brain juices flowing,

c) Making work environment conducive for brainstorming and creative thinking; to prevent top designers from leaving to set up their own practice.

3) Prospects and Competition in China

Competition is expected to be stiff, as there are many incumbent local players. However, Kingsmen intends to set up office in phases all over China, beginning with Chengdu. They already have an office in Beijing and Shanghai. Theme parks are big business in China with Disneyworld already offering Kingsmen some parcels of work. Benedict Soh is confident of clinching more parcels as thus far they are “very happy” with the quality of work as compared to local contractors.

Andrew Cheng (GM of Kingsmen) mentioned that there was a requirement for Chinese to engage foreigners as part of their regulatory environment, to work on massive projects such as theme parks. So this was advantageous to Kingsmen as they are already established and have a presence in China.

4) Margins

A shareholder mentioned that M&E net margins had decreased from 7-8% back in 2008 to about 6.25% for FY 2009 and FY 2010, in spite of the absence of the mega USS contract for FY 2010. Management acknowledged this and said that there was a learning curve involved when it comes to managing large theme park and scenic projects, and they assured that as they grew more familiar with such projects, the net margins would also rise as they could then bid more aggressively.

5) Theme Park Projects

Bidding for theme park projects in China and other Asian countries should begin as early as in the next few months, and there will be others which are gearing up for construction in 2012 and 2013, for which Kingsmen can only pitch for late-2011. Kingsmen are confident of getting some parcels of work at least as the project is so massive that one player alone cannot handle the scope.

When asked about the competitive environment and how Kingsmen is going to win over the competition by positioning itself as superior, Andrew mentioned that the theme park projects are so huge that other players like Pico FE and Cityneon would also get some parcels. It is just a matter of who gets how much of the contract. All players will work together to ensure the project takes off successfully.

6) Debt-Equity Ratio

Another shareholder talked about gearing and debt-equity ratio, citing the Annual Report which mentioned that gearing was 9+% for FY 2010. His take on it was that analysts had used total liabilities to equity to compute debt-equity ratio and if this was done then Kingsmen had a gearing ratio of almost 1.0. He then asked if a rights issue was on the cards to reduce the “gearing”. Ben Soh’s reply was why raise cash which the company does not need! Another shareholder shot down the proposal and said the formula was wrong to begin with.

7) Fixtures Export Business

Fixtures export business is mainly to European customers and Kingsmen are one of only a few Asian companies who attended a Trade Show in Europe. Customers are making strong enquiries as Kingsmen can deliver the quality they require but with an Asian cost structure, thus pricing is definitely more competitive as compared to European competitors (who do fabrication). Kingsmen fabricates the fixtures at its KL office and ships them over direct. This business used to generate reveunes of just $5 million with a 20+% gross margin, but now has hit $20 million for FY 2010 and is expected to grow even further.

8) Sporting Events

Andrew also mentioned that Kingsmen will consider sporting events, such as the ones Cityneon are handling now. It is basically an extension of what they are already doing in terms of arranging for Formula One seating.

Andrew is also confident that Formula One will be extended for another 3 years, even though it is not announced officially yet. Right now, the last year for F1 will be 2012. If the F1 is extended, Kingsmen will most likely be asked to manage it again.

9) Variation Orders

Variation orders (VO) are expected from USS and also various theme parks, so these are of higher gross margins and will add to the recurrent revenue theme. The good thing about theme parks is the constant need to change their attractions and to refurbish to make it look good and updated, so as to attract hordes of crowds. Kingsmen expects VO to be a common occurrence for theme parks in the region once they have been completed and require constant refurbishment, thus ensuring a constant revenue stream not just for Kingsmen, but all players in the thematic scene.

10) Revenues and Order Book

Revenue projected to be fairly flat this year and can be maintained as there is still ongoing work on Disneyland Hong Kong, Gardens By The Bay and also River Safari. Most of the Orchard Road malls are done with refurbishment, and the Marina Bay Sands Shoppes are also a one-off, but the heartland malls are now gearing up for renovations and will keep Kingsmen busy. Also, Malaysian malls like Mid Valley are due for their 3-year refurbishment and this will also add to the work done by Interiors Division.

Kingsmen will be announcing their 1Q FY 2011 results and order book by the second week of May 2011, and according to Management, it will be higher than the S$80 million announced for their FY 2010 results. As the bidding for theme park projects can only take place later this year and in 2012 and 2013, I would expect revenues to trend up very gradually and steadily over the next 3 to 4 years. Assuming Kingsmen can at least maintain net margins, this would also imply that net profit can also increase steadily, albeit slowly.

11) Other Pertinent Matters

i) The piece of land which Kingsmen is sitting on has a remaining 5-year lease, at a very attractive rate of about $1.05 per square foot. It was sold and leaseback from Mapletree Logistics Trust. Kingsmen are actively looking for a plot of land for an office cum workshop which is twice the size of their current premises.

ii) On whether scenic/thematic will be classified as a separate SBU from M&E, the answer is no. As the revenue contribution from scenic/thematic works increases, it will continue to be accounted for under M&E but internally, it will be treated as a separate business unit with its own team.

iii) Contract staff for theme parks work includes specialized people from USA and other countries. These are hired on a contractual basis and thus costs are higher when tendering for theme park projects. I did enquire on their intention for in-house training to reduce costs, but Andrew was distracted and did not provide a reply.

iv) Arbitration case - This has a potential exposure and liability of several million SGD, as a result of disputes between contractor and Kingsmen on the amount of work done. This is the first time they are encountering such an issue. Disclosure was made but since liability cannot be determined, did not provide as a contingent liability in the books.

v) Regarding the announcement of contract wins, this cannot be done as there are strict confidentiality clauses from their clients prohibiting them from doing so.

So that about wraps up my review and highlights of the AGM. All shareholders were treated to a sumptuous lunch and it was quite a feast! For once I could safely tuck into my food while still engaging Andrew on the salient aspects of the Company, and found the experience to be wonderfully enjoyable. Management was candid, friendly and also prudent, and Benedict Soh’s way of speaking, tone and Management style reminds me very strongly of FF Wong, CEO of Boustead. Both of them spoke on being prudent and conservative, not raising cash they did not need, and the necessity of retaining top talent to grow the Company. The only topic I did not manage to bring up was the issue of succession planning, but I think it is a question which can be reserved for next year’s AGM!

Andrew was then kind enough to take a few of us shareholders on a tour of the Kingsmen building and premises. The showroom on the first floor contains a lot of fabrication work for Interiors, and acts as a test bed for designers to work on and display their finished products. I saw a scale model of the Disney castle used for USS, and there were also counter displays for Chanel and Nespresso (a new client). The tour also took us past the offices and cubicles, and the design was indeed very hip and modern and defined Kingsmen as a design-driven company. I also had the chance to look at the warehouse, where many of the standard equipment and props were stored which were used for Exhibitions and Museums (e.g. bar chairs). Kingsmen also has a fabrication section where wood-working is done, and I witnessed many workers doing sawing, planing and other wood-related activities, and this was for the Interiors business.

Interesting fact – most of the fabrication for USS and mega-projects was done in Kuala Lumpur Malaysia as it was cheaper there, and the items sent directly on site to save on costs. The simple tour also helped me to understand how Kingsmen was structured, and many of the offices on various floors were “bursting at the seams” as Kingsmen was still expanding its teams of designers and therefore required more space, which is why they plan on moving to a building twice the size of their current premises.

Finally, I went back to the top floor again just to sit down, have some food in a relaxed manner, and generally just chill out with some fruit punch. To end this post, here is a picture of Kingsmen’s chill-out corner, and I must say the staff are lucky to have these facilities (including a bar) for them!