Results Review, 16 August 2013

Kingsmen Creatives (KMEN SP)

Buy (Maintained)

Consumer Non-cyclical - Commercial Services Market Cap: USD137m

Target Price: Price:

SGD1.08 SGD0.91 Macro Risks

Expect a Strong 2HFY13

Growth Value

Kingsmen Creatives (KMEN SP) Price Close

Relative to Straits Times Index (RHS)

1.00

124

0.95

118

0.90

112

0.85

107

0.80

101

0.75

95

0.70 6

89

0 0 . 2 0 0 KMEN’s 2QFY13 PATAMI grew 4.3% y-o-y to SGD5.4m, on the back of a . 0 12.7% increase in revenue. Its orderbook continues to grow as demand 0 for its services remains strong, which would boost 2H13’s performance. 0 Its ability to secure more projects and grow its business is supported by a sturdy balance sheet. Maintain BUY for stable dividends with a TP of SGD1.08, based on 8x FY13 P/E (ex-cash).



Margins slightly lower. Kingsmen Creatives (KMEN)’s 2QFY13 revenue rose 12.7% y-o-y to SGD79.9m, as its interiors division’s business grew. The division’s 33.8% y-o-y growth was partially offset by a 25.7% y-o-y decline in revenue from the exhibitions & museums division, as fewer major exhibitions are held during the odd years. It also recorded a 4.0% y-o-y dip in revenue from its high-margin research & design division. As a result, gross margins were slightly lower.



Potential new jobs back orderbook growth. KMEN’s orderbook stands at SGD294m, of which SGD232m is expected to be recognised in FY13. These projects include works for a few regional theme parks, the five-year F1 Singapore Grand Prix and interior fit-outs for a number of international brands. The regional meetings, incentives, conferencing and exhibition (MICE) industry’s prospects remain healthy as each country seeks to attract new events and tourist numbers. Asia’s thematic & scenic industry also continues to develop. International brands are still expanding in Asia, supported by a growing number of middle-income consumers. Such trends present many new opportunities for KMEN, which has strong capabilities in these areas. Management is currently working on garnering several contracts, which would contribute positively to its orderbook.

5 4 3

Jun-13

Apr-13

Feb-13

Dec-12

Oct-12

1

Aug-12

Vol m

2

Source: Bloomberg

Avg Turnover (SGD/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (SGD) Free float (%) Shareholders (%) O-Vest Pte Ltd Islanda Pte Ltd

0.06m/0.05m -4.4 19.5 0.73 - 0.96 33

19.6 19.6

Shariah compliant

  2  . 2 0 . 2

   



Strong balance sheet. KMEN has a net cash balance of SGD54.4m (or SGD0.28 per share). This would support its bid for more projects, while sustaining its dividend payout policy. The company announced a dividend of SGD0.015 per share for 1H13. While revenue growth is likely to moderate going forward, given its tight manpower for project management (note that it has had to turn down some projects), we continue to like the stock for its stable dividends. Maintain BUY.

Forecasts and Valuations

Dec-10

Dec-11

Dec-12

Dec-13F

234

261

290

313

334

Reported net profit (SGDm)

15.1

16.3

17.1

18.9

20.3

Recurring net profit (SGDm)

15.1

16.3

17.1

18.9

20.3

1.1

8.4

4.9

10.4

7.4

Core EPS (SGD)

0.08

0.09

0.09

0.10

0.11

DPS (SGD)

0.04

0.04

0.04

0.04

0.04

4.4

4.4

4.4

4.4

4.4

Total turnover (SGDm)

Recurring net profit growth (%)

Dec-14F

Lynette Tan 65 6232 3895

Dividend Yield (%)

[email protected]

Core P/E (x)

11.7

10.6

10.1

9.2

8.5

Return on average equity (%)

27.7

26.7

24.6

24.8

24.4

P/B (x)

3.08

2.69

2.34

2.21

1.97

P/CF (x)

9.91

8.49

6.21

9.42

9.38

EV/EBITDA (x)

7.03

6.86

5.63

5.19

Net debt to equity (%)

net cash

Our vs consensus EPS (%)

net cash

net cash

net cash 0.6

4.70 net cash (3.8)

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

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1

Kingsmen Creatives (KMEN SP) 16 August 2013

2Q13 Results Summary Figure 1: Quarterly Results YE 31 Dec (SGDm)

2Q13 2Q12

Revenue

79.9

Cost of sales Gross profit Other Operating Income Depreciation Salaries and related costs Other operating expenses

70.9

(59.3) (51.4)

y-o-y % 1Q13 q-o-q % Remarks 12.7%

42.6

87.6% Revenue growth boosted by Interiors division, off set by decline in Exhibitions.

15.5% (29.5) 101.1%

20.5

19.5

5.3%

13.1

57.1%

1.2

0.9

32.3%

1.2

1.0%

(0.4)

(0.4)

-0.2%

(0.4)

(11.7) (10.6)

10.1%

(8.8)

7.2% 32.8% Staff cost was higher, mainly due to provision for bonuses which is linked to profits achieved.

(2.8)

(3.3)

-13.9%

(3.0)

Operating profit

6.8

6.1

11.4%

2.1

Financial income, net

0.1

Share of Associates

0.3

0.4

-21.1%

0.4

-26.7%

Profit Before Taxes

7.2

6.5

10.3%

2.5

189.7%

Income Tax Expense

(1.4)

(1.3)

13.0%

(0.5) 204.3%

Minority Interest

(0.3)

(0.1)

450.8%

0.2 -254.9%

5.4

5.2

Net Income

(0.0) -1220.0%

4.3%

-4.8% 227.5%

(0.0) -230.2%

2.2

141.9%

Margins (%) Gross profit

25.7% 27.5%

3.2 ppt 30.7% -5.0 ppt Decline was due to lower Research and Design revenue (-4%).

EBIT

8.5%

8.6%

-3.7 ppt

4.9%

3.6 ppt

PBT

9.0%

9.2%

-3.4 ppt

5.8%

3.2 ppt

PATAMI

6.7%

7.3%

-2.1 ppt

5.2%

1.5 ppt

Source: Company data

See important disclosures at the end of this report

2

Kingsmen Creatives (KMEN SP) 16 August 2013

Financial Exhibits Profit & Loss (SGDm)

Dec-10

Dec-11

Dec-12

Dec-13F

Total turnover

234

261

290

313

Dec-14F 334

Cost of sales

(170)

(194)

(218)

(235)

(250)

Gross profit

64

67

73

78

83

Gen & admin expenses

(2)

(2)

(2)

(1)

(1)

Selling expenses

(35)

(38)

(41)

(44)

(47)

Other operating costs

(12)

(12)

(14)

(15)

(16)

Operating profit

15

15

16

18

19

Operating EBITDA

19

19

20

21

22

Depreciation of fixed assets

(4)

(3)

(4)

(3)

(3)

Amortisation of intangible assets

(0)

(0)

(0)

(0)

(0)

Operating EBIT

15

15

16

18

19

Other recurring income

4

4

6

6

7

Interest income

0

0

0

0

0

Interest expense

(0)

(0)

(0)

(0)

(0)

Pre-tax profit

20

20

22

24

26

Taxation

(4)

(3)

(4)

(5)

(5)

Minority interests

(1)

(0)

(1)

(1)

(1)

Profit after tax & minorities

15

16

17

19

20

Reported net profit

15

16

17

19

20

Recurring net profit

15

16

17

19

20

Dec-10

Dec-11

Dec-12

Dec-13F

Dec-14F

15

15

16

18

19

4

4

4

3

3

(3)

(1)

6

(0)

(4)

Source: Company data, OSK-DMG estimates

Cash flow (SGDm) Operating profit Depreciation & amortisation Change in working capital Other operating cash flow Operating cash flow Interest received Interest paid

5

5

6

5

5

21

23

32

26

23

0

0

0

0

0

(0)

(0)

(0)

(0)

(0)

Tax paid

(3)

(3)

(4)

(7)

(5)

Cash flow from operations

18

20

28

18

18

Capex

(6)

Other new investments

(4)

Other investing cash flow

(3) -

(2) -

(3) -

1

0

0

Cash flow from investing activities

(9)

(2)

(2)

(3)

Dividends paid

(7)

(8)

(8)

(8)

Proceeds from issue of shares Increase in debt Other financing cash flow Cash flow from financing activities

0

-

-

-

-

-

8

(0)

(1)

(0)

(0)

(0)

(3) (3) (8) -

(0) -

(0) -

2

(8)

(9)

(8)

(8)

Cash at beginning of period

23

30

33

53

56

Total cash generated

10

10

Forex effects

(1)

1

Implied cash at end of period

32

40

18 51

7 61

8 63

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

3

Kingsmen Creatives (KMEN SP) 16 August 2013

Financial Exhibits Balance Sheet (SGDm)

Dec-10

Dec-11

Dec-12

Dec-13F

Dec-14F

Total cash and equivalents

30

33

53

56

62

Inventories

14

11

18

16

17

Accounts receivable

70

88

74

83

93

Other current assets

7

8

12

11

12

120

141

156

166

183

Total current assets Total investments

8

8

9

9

9

12

11

9

9

9

Intangible assets

6

5

5

5

4

Total other assets

0

0

0

0

0

25

25

23

23

22

146

166

180

188

206

3

3

3

3

2

Accounts payable

38

41

45

49

54

Other current liabilities

42

51

53

53

57

Total current liabilities

83

95

101

105

113

Total long-term debt

2

2

2

2

2

Other liabilities

1

1

0

0

0

Total non-current liabilities

3

3

2

2

2

Total liabilities

86

98

103

107

115

Share capital

23

23

23

23

23

Retained earnings reserve

35

43

52

56

66

Other reserves

(2)

(1)

(1)

(1)

(1)

Shareholders' equity

57

65

74

78

88

3

3

3

(0)

0

(0)

Tangible fixed assets

Total non-current assets Total assets Short-term debt

Minority interests Other equity Total equity

2 -

3 -

59

68

77

82

91

146

166

180

188

206

Dec-10

Dec-11

Dec-12

Dec-13F

Dec-14F

(3.5)

11.7

11.2

7.9

6.6

Operating profit growth (%)

1.0

0.6

5.0

9.5

7.3

Net profit growth (%)

1.1

8.4

4.9

10.4

7.4

EPS growth (%)

1.1

9.8

4.9

10.4

7.4

10.0

14.7

14.7

6.0

12.3

Operating margin (%)

6.5

5.9

5.5

5.6

5.7

Net profit margin (%)

6.4

6.3

5.9

6.0

6.1

10.6

10.5

9.9

10.3

10.3

Total liabilities & equity Source: Company data, OSK-DMG estimates

Key Ratios (SGD) Revenue growth (%)

Bv per share growth (%)

Return on average assets (%) Return on average equity (%)

27.7

26.7

24.6

24.8

24.4

(41.4)

(41.2)

(62.9)

(63.4)

(63.1)

DPS

0.04

0.04

0.04

0.04

0.04

Recurrent cash flow per share

0.09

0.11

0.15

0.10

0.10

Net debt to equity (%)

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

4

Kingsmen Creatives (KMEN SP) 16 August 2013

SWOT Analysis  Strong capabilities in interior fit-out of retail outlets, inbuilding exhibitions and museum interiors, as well as thematic scenic construction

 Economic slowdown may lead to companies postponing their plans for theme parks, interior refurbishment or the setting up of new retail outlets

 Strong balance sheet

 Rising popularity of theme parks in Asia – many theme parks are set to open over the next few years  International lifestyle and luxury brands are moving their outlets to Asia, where consumers are still spending

 May be unable to expand the team of designers to take on more projects due to a lack of qualified personnel  Space constraints at current premises may also limit its ability to expand the team

P/E (x) vs EPS growth

P/BV (x) vs ROAE

14.0

12%

4.0

35%

12.0

10%

3.5

31%

3.0

26%

2.5

22%

2.0

18%

1.5

13%

1.0

9%

10.0

9%

8.0

7%

6.0

5%

P/E (x) (lhs)

EPS growth (rhs)

Source: Company data, OSK-DMG estimates

P/B (x) (lhs)

Jan-14

0%

Jan-13

0.0

Jan-12

0%

Jan-11

0.0

Jan-10

4%

Jan-14

0.5

Jan-13

2%

Jan-12

2.0

Jan-11

3%

Jan-10

4.0

Return on average equity (rhs)

Source: Company data, OSK-DMG estimates

Company Profile Kingsmen Creatives, a regional communications design and production group, builds displays for exhibitions and provides interior fit-out services. Its interiors division’s clients are high-end brands such as Tiffany, Dior, Swarovski, Guess, Abercrombie & Fitch, Gucci, Robinsons and BMW. Its exhibitions & museum division is involved in thematic and scenic construction (ie theme parks). The company counts the construction of some attractions at Universal Studios Singapore and extension works at Hong Kong Disneyland as some of its projects.

See important disclosures at the end of this report

5

Kingsmen Creatives (KMEN SP) 16 August 2013

Recommendation Chart Price Close 1.08

0.93

0.83

0.83

0.76

0.82

Recommendations & Target Price

0.77

0.9

NR

1.0

0.8 0.7 0.6 0.5 0.4 0.3 Buy 0.2 Aug-08

Neutral

Sell

Nov-09

Trading Buy

Mar-11

Take Profit

Not Rated

Jun-12

Source: OSK-DMG estimates, Bloomberg Date

Recommendation

2013-05-17

Buy

Target Price Price 1.08

0.92

2013-03-05

Buy

0.93

0.81

2013-03-01

Buy

0.93

0.80

2013-03-01

Buy

0.93

0.80

2013-01-18

Buy

0.83

0.73

2012-11-06

Buy

0.83

0.77

2012-08-14

Buy

0.83

0.73

2012-05-14

Buy

0.76

0.65

2012-03-05

Buy

0.76

0.62

2011-11-10

Buy

0.76

0.58

Source : OSK-DMG estimates, Bloomberg

See important disclosures at the end of this report

6

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