Thursday, August 11, 2011

Kingsmen Creatives – FY 2010 Comprehensive Analysis Part 5

Part 5 of my comprehensive analysis is long overdue, it seems. My apologies for truncating my comprehensive analysis so abruptly, but somehow I get the feeling no one really missed Part 5? Haha. Or perhaps no one even remembered that there was supposed to be a Part 5! Anyhow, there still remained some points which I had yet to address in the first four sections of this analysis, and over the months nothing much has occurred to change my perception of the Company or have a different opinion on its business model and modus operandi. Hence, I shall push on with the final part of this analysis, which includes some qualitative aspects, prospects and plans as well as other pertinent issues.

Qualitative Aspects – Management Quality

Management, which includes the founders Benedict Soh and Simon Ong, have had 35 years of experience in running the Company, and have built it literally from scratch to the scale it is now. They thus have intimate knowledge of how to run Kingsmen and also a very in-depth understanding of the industry in which Kingsmen operates – that of MICE and also the Interior Fit-Out and marketing segments. These two guys also used to design and therefore they know how to look out for good talent and to hire such talent in order for Kingsmen to grow further. Much emphasis is placed on retaining quality designers and suitable talents for taking the Group to the next step, and the communication which I received at the recent AGM was that Management is committed to staff welfare and making the staff feel at home and that they are part of one big family.
This will definitely heighten staff morale, and the interesting designs of the office environment also make it a more lively and engaging workplace.

Prospects and Plans – Formula One and USS

There has been news that the current Formula One Grand Prix, of which Kingsmen has signed a five-year contract to build the spectator stands since 2008, may continue its run for another three years or more if the Government gives the green light. Till now the announcement has yet to be made as a committee is still “deliberating” on the pros and cons, but Andrew Cheng of Kingsmen is quietly confident that the Formula One will carry on, as it has already boosted tourist revenues and made the whole island abuzz with talk of F1 racing and the performances which come along with it annually. If the extension were to come to pass, this would represent more recurring revenue for Kingsmen’s Museums and Exhibitions division.

On the Universal Studios Singapore (USS) front, it is also anticipated that theme parks such as USS will hand out frequent variation orders (VO) to companies such as Kingsmen to refurbish their existing attractions, while fabricating new ones. Shrek’s castle and Madagascar were two recent parcels of work completed by Kingsmen, and for 2012 USS would have to update its attractions to ensure it remains relevant (Transformers 3, or Harry Potter, perhaps?) and thus will enlist Kingsmen for these VO. These parcels of work are expected to come in phases but will still be an almost annual or biennial affair, so it should represent a form of recurring income for Kingsmen as well, assuming they can continue to build up their theme park portfolio outside of Singapore.

Prospects and Plans – Packaged Solutions for Customers using IMC

Right now, R&D and IMC divisions are minor contributors of revenue to the Kingsmen Group, the bulk belonging to Interiors and Museums and Exhibitions. This may change in the next few years as Kingsmen intends to leverage on offering a packaged complete solution to its existing and new clients; and IMC will be at the forefront of this new packaging. Integrated Marketing Communications basically includes new media like outdoor display panels featuring adverts, as well as new forms of marketing media which Kingsmen will utilize to achieve its intended effect(s) for the client. Andrew Cheng mentioned that this division could see its revenues soaring if the new media is readily accepted by new clients, and Kingsmen is trying its best to roll-out these new medium in order to capture a growing slice of the market for innovative advertising.

R&D also has its place in that clients can engage Kingsmen’s services to find out more about different advertisement styles or to brainstorm on creative ways to market their products or to reach out to a mass audience. With Kingsmen’s intention to drive these two divisions to capture more market share, it will probably take some time and patience before their efforts bear fruit. Nevertheless, it is heartening to note that Management is not just casting aside these two smaller divisions and neglecting them.

Prospects and Plans – Sports Events and Signage Business

Kingsmen could potentially tap into another related area of business which is close to their Museums and Exhibitions Division, and that is sports marketing and sports event-related marketing. In my previous analysis of Cityneon Group, I noted that one of their business divisions handles sporting events and related signage for the events. Kingsmen thus far have not ventured into this area, and I feel there is good potential for them to broaden their range of services and to leverage on their Kingsmen branding to penetrate the market for sporting events. Note that the Sports Hub will be completed by the year 2015, and as such major sporting events would be able to be held in Singapore; thus the business could become a lot more lucrative in future. Kingsmen can start planning and building up their capabilities and competencies in this area so as to capitalize on opportunities once the Sports Hub is completed.

Others – Management Re-Shuffling Jan 1, 2011

On December 29, 2010, Kingsmen announced a slew of Management changes and shuffling in order to take the Group to the next level of growth. The changes are summarized as follows:-

• Mr. Anthony Chong (former executive director, Kingsmen Exhibits since 1999) – He will be promoted to Managing Director of Kingsmen Exhibits and will remain as Board Director. His new roles and duties include sourcing and identifying new business opportunities and businesses to drive the Museums and Exhibitions Division, including Thematic works.

• Mr. Alex Wee (former executive director, Kingsmen Projects since 2000) – He will be promoted to Managing Director of Kingsmen Projects and be responsible for growing the Group’s retail and corporate Interiors business.

• Mr. Simon Ong (founder and Group MD) – He will be promoted to CEO as well, and oversee the Group’s operational aspects, chart its strategic direction and be in charge of the creative direction and standards of the Group.

• Mr. Benedict Soh (founder and Executive Chairman) – He will transition out of his day-to-day roles (handing over to Mr. Simon Ong) and be in charge of business development and Kingsmen’s overseas operations.

All the above changes will take place on January 1, 2011. I believe the aim of the internal re-structuring is to place more attention on Kingsmen’s overseas businesses, which have been lagging somewhat; and also to sharpen their focus on Interiors and M&E divisions. I guess the results will only show up in the next 6 to 8 quarters, as I believe the Group is steering itself to clinch the mega theme park projects in the region. Since Kingsmen keeps a tight lid on news (because of confidentiality clauses), and can only report their order book four times a year, it is difficult to do any meaningful projects of revenue and of deal flow. Kingsmen is expected to release their results in one or two days time, and it will be 1H FY 2011 results, so it is critical to assess if their business development efforts have bore fruit; and to also assess the healthiness of the cash flows of the Group. I will be looking forward to the same 1.5 cents/share interim dividend as per 1H 2010.

Others – Privatization Target?

It is interesting to note that Kingsmen may be a potential privatization target, as it has a proven business model, is selling very cheaply (in terms of valuations) and is also generating very healthy and consistent free cash flows. Cityneon was actually privatized by Laviani Pte Ltd (a wholly-owned subsidiary of Star Publications Sdn Bhd) back in November 2008 at a historical PER of 12.7x (the revised offer at the time was 62 cents/share, up from the original 58 cents/share). Interestingly, the original offer for Cityneon was madeby Yellow Pages back then at 55 cents/share.

Kingsmen is currently trading at a historical FY 2010 PER of 7.2x (EPS of 7.93 cents for FY 2010, last done price at 57 cents/share). Assuming the same valuation was accorded to it as the Cityneon buy-out 3 years ago (at 12.7x), Kingsmen’s fair value should therefore be in the range of $1.007. This would value the entire company at about $190 million (189.381 million issued shares), which still seems cheap compared to its cash generation potential, strong track record and capable Management Team. Of course, Mr. Benedict Soh did allude to suitors asking to buy over the Company at lower valuations, and his reply was naturally to reject such offers as he did not see Kingsmen’s value being fully realized or appreciated. His aim was to double Kingsmen’s revenues by 2014 compared to FY 2010’s revenues. This would make EPS higher, and coupled with a proven business model of requiring low working capital; these factors would make the Group more attractive for sale by then.

Another reason for potential privatization (besides the fact that Mr. Soh had been approached before on more than a few occasions) is that neither of the founders have their children working for the Group. Mr. Soh, who is 63 this year, has three children who are pursuing their own professions – one is a legal counsel, one is in medical school while the youngest is in law school. Mr. Ong, who is 59 this year, has two children (both daughters) – one is studying in the USA while the other is an architect (information courtesy of Pulses Magazine Sep 2010 Issue). This would imply that the founders would wish to sell off the business if their intention is to retire, and since they have no direct descendants who are going to manage the business. Assuming Ben Soh’s vision of doubling revenue really comes true by 2014, he will be 66 years old while Simon Ong will be 62 years old. If Kingsmen proves to be such a valuable business, I am sure Mr. Market will, in time to come, price the Company accordingly as well. Considering the fact that Kingsmen has a much more established client base and international reach as compared to Cityneon, it might even be justified to accord it a much higher valuation premium than the 12.7x which was offered for Cityneon three years back.

Until the day comes, I will, in the meantime, continue to enjoy healthy dividends from the Company (1.5 cents interim, 2 cents final and 0.5 cents special for FY 2010).

This concludes my comprehensive analysis for Kingsmen, and the usual disclaimers apply. I will probably only do another review and analysis of Kingsmen after the release and digesting of the 1H FY 2011 results (tonight).


Royston said...

Hi MW,

Thanks for a great analysis of the fundamentals of Kingsmen. I too, am enjoying the attractive dividends from Kingsmen, especially in the current volatile market.

Musicwhiz said...

Hi Royston,

You're most welcome. I am glad the business is growing slowly and steadily and though there will be dips and disappointments, I believe Kingsmen will be able to maintain its current yield.

Growth prospects do seem a little uncertain but we have to trust that Management knows what it is doing and that they can achieve their target by 2015!


Lemizeraq said...

Hi MW,

Based on your very detailed multi-part analysis of Kingsmen, I have just bought some of their shares just a few days ago.


Musicwhiz said...

Hi Lemizeraq,

Good to know you are a shareholder too! But note that for Kingsmen, you need to have at least a minimum 4-5 year horizon in order for the value of the company to crystallize.