Wednesday, 19 April 2017

IS KINGSMEN CREATIVES A VALUE TRAP?


Kingsmen Creatives is a company that recently caught my eye. The company has four business segments - exhibitions and thematic, retail and corporate interiors, research and design and alternative marketing. It organises events including the Formula 1 Singapore Grand Prix and the Singapore Airshow, and designs interiors for Uniqlo, DBS Bank and Coach. 

As a value investor, I constantly look for shares that are trading close to their 52-week lows. Kingsmen Creatives is currently trading at 60 cents, just off its 52-week low of 58.5 cents. When share prices of companies decline, it could either be an opportunity to purchase undervalued shares, or it could be a value trap. Understanding the fundamentals of the company would allow us to make an informed investment decision. 

Profitability of various segments



Of the four business segments, the research and design segment has the highest profit margins, with a profit of $1.49 million from $15 million of revenue. The two segments which make up the majority of revenue have lower margins - the Exhibitions and Thematic segment posted a profit of $11.2 million while the Retail & Corporate Interiors segment had a profit of $2.04 million.


Pre-tax Profits (millions)
20122013201420152016
Exhibitions and Thematic4.443.004.7710.2211.20
Retail and Corporate Interiors14.8117.1715.193.822.04
Research and Design3.232.623.021.081.49
Alternative Marketing0.470.200.14-0.151.04
Corporate and Others-1.40-0.99-1.776.68-1.42

Analysing the pre-tax profits from the various segments, I realised that the main reason for the fall in net profit was because of the Retail & Corporate Interiors segment contributing much lower profits in FY2015 and FY2016. While the pre-tax profits from the Exhibitions and Thematic segment doubled, it was insufficient to offset the lower profits from the other segments.

In its 2015 Annual Report, Kingsmen's chairman explained that their Retail & Corporate Interiors division was adversely affected by slow demand in the high-end luxury retail segment, which caused the sharp fall in profits. The chairman also expected the Exhibitions & Museums division to maintain its momentum and continue to perform well. My thoughts on the profits from the various business segments is that earnings from each segment can be rather volatile, and there is little certainty as Kingsmen has to constantly seek to secure new projects. 

Why did its share price fall drastically?





Looking at these earnings in the annual report might give us the impression that its net profit has been increasing steadily from 2012 to 2015, while falling sharply in 2016 to $11.9 million a drastic 38% decline. However, the higher earnings for FY2015 was due to a one-off gain of $5.9 million realised from the disposal of interest in an associate. That means that the net profit for FY2015, excluding the one-off gain, should be only $13.2 million. As net profit has been declining since FY2014, the fall in share price from its peak of $1.06 in 2015 is probably justified.  


Huge cash pile


One of the positives is that Kingsmen maintains a strong balance sheet, with $74.5 million in cash and cash equivalents as of 31 December 2016, which is a significant amount compared to its market capitalisation of $119 million. With 198 million ordinary shares issued, this gives us 37.6 cents in cash per share, which makes up to more than 60% of its current share price. Having a large amount of cash limits the downside risks of its share price.

With that much cash on hand, I'm unsure why Kingsmen would not want to pay off all its debts. For FY2016, Kingsmen recorded an interest income of $353,000, while interest expense was $596,000 on borrowings of $11.06 million. If Kingsmen was repaid all its borrowings, interest expense savings would add $596,000 to its net profits, a substantial increase of 5%. Perhaps shareholders could seek the management's opinion on this issue during its AGM on 28th April. 


Conclusion


At its current valuation of 10 times earnings, the market certainly does not expect Kingsmen to have much growth potential. The company has also cut its dividend from 4 cents per share to 2.5 cents as it expects tough business conditions continue. The current yield of 4.2% is decent. 

The low profit margins of its business probably reflects the challenging business environment and that Kingsmen cannot afford to charge its clients higher prices. I believe that 60 cents is a reasonable price for investors, and when the Retail & Corporate Interiors shows some earnings recovery, investors would be rewarded for their patience. 

2 comments:

  1. They need the cash for $28m to build their new hq which will be ready in 2018.

    They also require the cash to tender for bids and use of their working capital in relation to the nature of operating industry they are in.

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    Replies
    1. Hi B,

      Thank you for pointing that out! I made that comment because I felt that their cash levels were rather high relative to previous years. Actually, I read your blog quite frequently and I'm inspired by your success.

      May I know if the amount you're referring to is the one listed as 'Capital
      Expenditure Commitments' on page 114 of their 2016 Annual Report?

      I've only started investing for a few years so I believe that I still have a lot to learn along the way

      Cheers!

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