Kingsmen Creatives

Introduction:

Kingsmen has 4 business segments: 1) Exhibitions and Museums, 2) Interiors, 3) Research & Design, 4) Integrated marketing communications. The main drivers of the company are 1 and 2. Over the years Kingsmen has found a niche in high-end retail shop designs, with Interior Designs outpacing Exhibitions. In my opinion they are the leaders of Interior Design in Asia and the Middle East.

Customer base:

Close to 80% are repeat customers with brand names such as Apple, Burberry, Chanel, DBS, Esprit, FJ Ben, Gap, Gucci, John Little, Marks & Spencer, Nokia, Nuance Watsons, Omega, Polo Ralph Lauren, Robinsons, Standard Chartered Bank, Tag Heuer, Tiffany, Tommy Hilfiger, Wing Tai, Aldo, BMW etc.

Competitors:

One of their main competitors are Pico Far East Holdings(listed in HK) which specialises in Exhibition and event marketing services. Although Pico's NAV is approximately 4 times larger than Kingsmen, in terms of revenue from 2H07 and 1H08, Kingsmen's revenue only lacks behind Pico's by approximately 20%. Pico has slightly higher margins by 1%. Kingsmen is securing more contracts and catching up with Pico. The other is Cityneon whom only has a small share in the market.

Note: Exchange rate S$1 : HK$5.45

Income statement: (values are in '000 unless stated otherwise)

............2003.....2004......2005.....2006.....2007......1H08.....F2008
Revenue..53,477..63,261...76,74...108,945...146,131....77,74..194,350
NP.........1,579.....1,580....2,364....4,684.....10,243....5,750...13,605
NP.margin..3%.......2.5%.....3.1%......4.3%.......7%........7.4%.......7%
EPS(cents)..1.78....1.41......2.17.....4.88.......7.87.......2.85........7
EPS.growth.........-20.8%....53.9%...124.9%....61.3%...............-11.1%

Increasing revenue tells us that this is a growing industry, at the same time their expansion strategies to regional areas are doing well. According to my predictions for F2008, EPS growth might drop due to more outstanding shares issued from acquisition of subsidiary and associates. Usually 2H of results would be better because it will contribute approximately 60% of total revenue for the year. That is how I come out with F2008 prediction as usually there will be more demand for designs from retail stores due to the coming holiday season.

DCF valuation:

.......................2003.....2004.....2005.....2006.....2007....F2008
Net.income........1,579....1,580....2,364.....4,684...10,243...13,605
+Depreciation.....440.......544.......795.......1,137....1,703....2,538
+Amortisation.................................................121.......167
-Capital.exp......610......490.......1,422.....1,172.......866.....1,500
FCF................1,409...1,634.....1,737.....4,649.....11,201...14,810
FCF.growth..................16%.......6.3%....167.6%....141%.....32.2%

Using Warren Buffett's owner's earnings or free cash flow(FCF). Capital expenditure does not include investment into subsidiaries, but only expenditure necessary to keep the company running. Since Kingsmen's core assets are it's people, the costs have been deducted from income statement.

.......................F2008....F2009....F2010...F2011.....F2012
FCF................14,810....19,253....24,066...28,879...33,211
FCF.growth.........32.3%.....30%.......25%........20%.......15%
PV.using.DF.4%.....14,240...17,800....21,395...24,686...27,297

I used a conservative estimate of 30% FCF growth in F2009 and decreasing FCF growth by 5% for the next 3 years to calculate DCF for 5 years. However bearing unforeseen circumstances, I can safetly say that FCF growth will increase in 2009 and 2010, by how much, I do not know.
Discounting factor(DF) of 4% to calculate present value(PV) is the risk-free interest rate for Singapore government securities(SGS) in the long run. (rounded off from 3.5% of 20yrs SGS)

There is increasing revenue growth in China and the rest of Asia. Revenues will increase significantly from the 2 IRs and new malls in Orchard Road. Some say that we cannot bang on the idea of IR, however look at the many retail stores that are going to be setup there, Kingsmen will definitely have a share of it from their customer base. The demand for interior design would be high.

Outstanding shares as of June'08: 194,183
Market Capitalisation at $0.43: 83,499
DCF for next 5 years= 14,240 + 17,800 + 21,395 + 24,686 + 27,297 = 105,418
Cash on hand and at bank= 25,417
Valuation: 105,418 + 25,417= 130,835
Discount: 36.2%

I used cash on hand and at bank instead of using NAV at 38,393 to be more conservative in DCF valuation. Like Warren Buffett said "it is better to be generally correct than precisely wrong". For others, 30% FCF growth may be too optimistic. Another thing I like about Kingsmen is they have very low debts, I got nothing much to comment on their balance sheet.

PER valuation:

Let us look into PER valuation. Average EPS growth for the 5 years is 40%. To be conservative, I will use my estimated EPS of 7cents. 20% growth in F2009 and F2010, 15% growth in F2011 and 10% growth in F2012.

EPS valuation: $0.07 x 1.2 x 1.2 x 1.15 x 1.1= $0.128
Average PER: 7 to 8
Price per share: $0.9 to $1.02
Margin of safety 40%: $0.54 to $0.61

Conclusion:

In general, business prospects look very good for the next 3 years. Kingsmen over the years have built up their brand, increased their moat, increased their market share and are known for their quality designs and efficiency in delivering their product. It is not an easy business as it requires capable management to run, however they are in an easy industry as there are very few competitors thus far. Barriers to entry is huge as multi-million contracts are usually offered to big design companies like Kingsmen, Pico or Cityneon.

Some points to note, that director's remuneration and fees are approximately 16% of gross margin and gross margin is around 25-30% of revenues. So if we know how much revenues they are going to earn, we can easily predict net profits.

So which method of valuation would you prefer? I would prefer DCF.

Please feel free to comment and critique. Thanks!

Ps: Took me quite some time to figure out how to load the excell spreadsheet into Blogger, in the end I gave up. If you would like more detailed figures on Kingsmen, feel free to ask from me.