Kingsmen Creatives - Revisiting The Thesis Part 1

As readers of my blog way back from 2010-2012 would probably know, back then I performed a detailed 5-part analysis on Kingsmen Creatives and posted in on my blog. Of course, much has changed in the last 6.5 years and the Company has also evolved and changed during that time, some parts for the better, and other parts for the worse. My initial idea was to present the thesis to readers and then highlight the sections which had altered or changed significantly since then; but this would have been tough for those who are not familiar with the Company or what they do.

Instead, I thought I would present the Company in a structured manner starting from a fresh slate, highlight the different aspects of it and packaging it in parts to cover it holistically and from all angles. This would cover the basic business, clientele, divisions, financials, margins, competition, strategic and future plans, changes to work culture / physical location, management and other pertinent details, both quantitative and qualitative. I believe that currently, within the investment blogosphere, there is no record of such a comprehensive analysis of a small-cap listed company - some sell-side reports do come pretty close but they generally tag themselves to a "target price" or "fair value" which is as long as.....one year. This detracts from my mission of long-term investing and distracts the reader from focusing on what is really important - the essence of what makes a Company great and why it should remain in one's portfolio for a significant period of time, barring a significant deterioration in the fundamentals and financials or a strategic shift in Management's focus and attention.

I will also cover the valuation in the latter part of the posts, but will come from the angle whereby I will comment on existing valuations and give a comparison with available competitors and industry players; but will NOT provide a fair value target price for what I deem is a very long horizon investment. Part of the reason shall be explained in the appropriate section on "valuation", but it should be easy enough for the reader to comprehend that with limited available information, building a robust financial model of any sort is close to impossible. Instead, I invest because I assessed Management's quality, the strength of the business and the robustness of the planning and steps taken to grow the business. These will be detailed in posts which will be split into parts, as follows:-

Part 1 - Introduction and Historical Background

Part 2 - Financials, Margins and Cash Flow

Part 3 - Divisional Analysis

Part 4 - Management Quality and Candour + Order Book

Part 5 - Competition and Industry Outlook

Part 6 - Future Plans, Catalysts and Strategies for Growth

Part 7 - Valuation, Sentiment and Risks

Part 1 (this post) will give a brief and concise introduction to the Group and its divisions, and also mention some of Kingsmen's clientele. Part 2 will delve into the financial highlights and the numbers which matter, including margins, cash flow and dividends. Part 3 will focus on the divisional analysis for Kingsmen, including the sales mix and margins for each division over the last 8 years. Part 4 will discuss the qualitative aspect which not many may talk about - Management candour and quality and also changes in the Management over the years, including succession planning and how staff are compensated. Part 5 will talk about Kingsmen's competitors - with a brief mention of Pico Far East (listed in Hong Kong but not strictly a competitor in many respects) and also Cityneon Holdings (which has been in the news a lot lately on their stellar results and the acquisition of their fourth intellectual property ("IP")). Part 6 is where I talk about the future for Kingsmen and their plans for growth in a new direction, with the Feb 2018 announcement of their tie-up with Hasbro to do up the NERF franchise. Part 7 ends off with a valuation discussion on Kingsmen (various methods to be considered) and also the overall sentiment surrounding the Group.

There may obviously be some overlap between sections which cannot be avoided, as some parts may reference other parts in an attempt to explain the overall thesis and why the Company remains compelling. As an example, during the divisional analysis I would also inevitably mention how each industry is faring in relation to the divisions, while Part 5 would also talk about this but also present trends in each industry and how they would impact Kingsmen and their competitors.

Disclaimer: Please note that all content which will be displayed here is obtained from public resources, including but not limited to sell-side reports, the Company's annual report(s), discussions with the Management at AGMs and also a study into the industry characteristics and competitive analysis through other pertinent reports. This is NOT intended to be a recommendation as to the merits or demerits of this investment and should NOT be construed as a recommendation to either purchase, hold or sell this security. This merely serves as a record of my investment thought process, how I view and analyze information, my thoughts on the Company (and industry) and how I see the future panning out.

Introduction

Kingsmen Creatives is a leading communications and design group established in 1976 with 21 offices around Asia serving global clients. It has four main divisions namely Exhibitions and Thematics ("E&T"), Retail and Corporate Interiors ("Interiors"), Research and Design ("R&D") and Alternative Marketing ("AM").

The Group is a market leader in the MICE industry, MICE being the "Meetings, Incentives, Conventions and Exhibitions" space, and helps in the organization of events such as Singapore Air Show, Art Stage Singapore and Formula One Night Race just to name a few events. E&T division is also responsible for installations at museums in countries such as Singapore and the Middle East, as well as for theme parks such as Universal Studios Singapore (back in 2009) and Disneyland Shanghai. Their work is also displayed at places such as the Singapore Fintech Festival 2017 in Singapore, Sourcing Taiwan 2017 in Taiwan, Hyosung at Textile India 2017 in India, BMW Motorrad at Thailand International Motor Expo 2017 in Thailand as well as Seoul Lounge at Seoul Biennale 2017 in South Korea.

For Interiors, Kingsmen is well-known for their high quality of work and also on-time delivery for their clients, which span a very broad range from AIA, Fendi and SingTel, to Ralph Lauren, Tiffany and Co and Van Cleef and Arpels. Many of these are well-known international brands and have been clients of Kingsmen for many years, forming their repeat customer base which provides a recurring form of revenue. For Interiors, other clients would include Armani Exchange, La Perla, Michael Kors, Zara, Massimo Dutti, Ted Baker and Longchamp.

For more details and information on Kingsmen's work and clientele, please do download their Kingsmen Watch 2018.

R&D and AM are divisions which add value and support the main divisions of E&T and Interiors, and these would include events and road-shows and also pop-up stores which are a feature of the new retail landscape. More will be mentioned later on regarding the evolution of the retail landscape which is a key feature of how Kingsmen is adapting, under Part 3 where I will do a detailed divisional analysis for Kingsmen on their two main divisions.

Historical Background

Kingsmen was established 42 years ago with founders Benedict Soh and Simon Ong, each of whom owns around 25% of the Group. They started out doing fit-outs and brands and stressed on delivering a high quality of work even as the industry was saturated with many competitors who offered the same types of services. Kingsmen differentiated themselves by being more than just a "contractor" - instead they focused on on-time delivery, quality and slowly built up more and more scale within the business. This allowed them to push ahead in terms of market share and also build up good branding for the business - all these moves attracted the attention of international brands which proceeded to do business with Kingsmen as it saw that the Group could deliver the level of quality required for international brands to expand into the Asian region.

When Kingsmen started out, they even did the Orchard Road Christmas decorations and Benedict mentioned that he was proud of being able to achieve that milestone despite tough weather and traffic conditions! Though they have come a long way since then, the Group did not forget its past and still did up the Christmas decorations for 2017 and also recently won the bid for both the National Day Parade 2018 and the historical upcoming National History Event 2019 (which will showcase the bicentennial founding of Singapore since the year 1819).

The next Part 2 of this comprehensive analysis will talk about the financials for Kingsmen and I will present a summary of key financial numbers and ratios over the last 8 years (2010-2017). Discussions will also centre around margins, balance sheet strength, debt, capex, cash flow and dividends.