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.