26-11-2018, 11:20 AM
This once beloved stock of numerous personal finance writers hit the skids as share price halved from a high of a dollar, 3 years ago. Like most under-performing small caps, KC looks to have entered the realm of market obscurity. Is KC going into terminal decline?
Retail Segment: Have Margins Bottomed Out?
Since retailers began encountering competition from their online counterparts about 3 years ago, KC's retail division has struggled with keeping its net margins positive. It must be tough to maintain prices at previous levels, if not raise them, when your customers are struggling. It does appear that the battle between physical and online retailers have found an equilibrium, as the margin erosion of KC's retail division seem to have stopped. KC also reported higher 9M18 profits. But since it shows no segment profit, the margins for the retail division will only be known when it releases FY18 results.
Retail Interior FY17 FY16 FY15 FY14 FY13
Revenue ($m) 143.1 150.4 128.9 174.3 166.6
Profit ($m) 3.4 2.0 3.8 15.2 17.1
Margins (%) 2.37 1.32 2.94 8.72 10.27
If we assume that the growth of e-commerce will result in a proportional decline in physical retailing, then sales from KC's retail division will also decline continuously as more of its physical retailers close shop. KC will then slide into losses and decline further in market value. But this does not appear to be what is happening. Retailers -- whether online or physical -- still believe in creating value for customers through sensory and interactive experiences:
https://www.businessinsider.sg/love-boni...hard-road/
https://www.scmp.com/tech/e-commerce/art...e-shopping
https://www.scmp.com/lifestyle/fashion-b...ring-women
Exhibition Segment: Still Healthy
Unless a majority of the world's population starts adopting otaku-like social withdrawal habits, it is likely that people will still yearn for physical interaction/stimulation, creating demand for aesthetically appealing and conducive physical environment. Results from KC's exhibition division seem to support this reasoning.
Exhibition FY17 FY16 FY15 FY14 FY13
Revenue ($m) 136.7 151.4 172.3 136.4 103.4
Profit ($m) 5.9 11.2 10.2 5.7 3.0
Margins (%) 4.31 7.39 5.91 4.17 2.90
Possibly, we will see a greater variety of tenants in each mall, and malls will differentiate themselves by having tenants which differ from their competitors. This means fewer Royal Sporting Houses, and more new (hitherto online-only) retailers like Love, Bonito. The remaining Royal Sporting Houses will refashion their spaces for product interaction, and not just a place for hanging racks of clothes. But this also means more specialised design and product requirements from KC, which mean lower efficiencies as design and production move away from being mass-produced.
Valuation: Not Expensive
With a good record of profitability, free cash flow, dividends, low leverage, and good reasons to believe that there is an enduring demand for its services, KC looks cheap with a share price of $0.52. Based on 199.5m outstanding shares, KC will have a market cap of about $103m. Here are some ways to look at its present valuations:
Price / PAT:
103/9.7 = 10.7
(based on FY17's PAT)
Ex-Net Cash Price / PAT:
(103-34)/9.7 = 7.11
(based on 3Q18's $34m of net cash, and FY17's PAT)
Price / Average of Past 3 Years' PAT:
103/(19.0+11.8+9.7) = 7.62
Ex-Net Cash Price / Average of Past 3 Years' PAT:
(103-34)/(19.0+11.8+9.7) = 5.11
P/B:
103/119.4 = 0.86
(based on latest book value)
As always, depending on your expectation of KC's future earnings, its present valuation will either be cheap, fair, or expensive.
Retail Segment: Have Margins Bottomed Out?
Since retailers began encountering competition from their online counterparts about 3 years ago, KC's retail division has struggled with keeping its net margins positive. It must be tough to maintain prices at previous levels, if not raise them, when your customers are struggling. It does appear that the battle between physical and online retailers have found an equilibrium, as the margin erosion of KC's retail division seem to have stopped. KC also reported higher 9M18 profits. But since it shows no segment profit, the margins for the retail division will only be known when it releases FY18 results.
Retail Interior FY17 FY16 FY15 FY14 FY13
Revenue ($m) 143.1 150.4 128.9 174.3 166.6
Profit ($m) 3.4 2.0 3.8 15.2 17.1
Margins (%) 2.37 1.32 2.94 8.72 10.27
If we assume that the growth of e-commerce will result in a proportional decline in physical retailing, then sales from KC's retail division will also decline continuously as more of its physical retailers close shop. KC will then slide into losses and decline further in market value. But this does not appear to be what is happening. Retailers -- whether online or physical -- still believe in creating value for customers through sensory and interactive experiences:
https://www.businessinsider.sg/love-boni...hard-road/
https://www.scmp.com/tech/e-commerce/art...e-shopping
https://www.scmp.com/lifestyle/fashion-b...ring-women
Exhibition Segment: Still Healthy
Unless a majority of the world's population starts adopting otaku-like social withdrawal habits, it is likely that people will still yearn for physical interaction/stimulation, creating demand for aesthetically appealing and conducive physical environment. Results from KC's exhibition division seem to support this reasoning.
Exhibition FY17 FY16 FY15 FY14 FY13
Revenue ($m) 136.7 151.4 172.3 136.4 103.4
Profit ($m) 5.9 11.2 10.2 5.7 3.0
Margins (%) 4.31 7.39 5.91 4.17 2.90
Possibly, we will see a greater variety of tenants in each mall, and malls will differentiate themselves by having tenants which differ from their competitors. This means fewer Royal Sporting Houses, and more new (hitherto online-only) retailers like Love, Bonito. The remaining Royal Sporting Houses will refashion their spaces for product interaction, and not just a place for hanging racks of clothes. But this also means more specialised design and product requirements from KC, which mean lower efficiencies as design and production move away from being mass-produced.
Valuation: Not Expensive
With a good record of profitability, free cash flow, dividends, low leverage, and good reasons to believe that there is an enduring demand for its services, KC looks cheap with a share price of $0.52. Based on 199.5m outstanding shares, KC will have a market cap of about $103m. Here are some ways to look at its present valuations:
Price / PAT:
103/9.7 = 10.7
(based on FY17's PAT)
Ex-Net Cash Price / PAT:
(103-34)/9.7 = 7.11
(based on 3Q18's $34m of net cash, and FY17's PAT)
Price / Average of Past 3 Years' PAT:
103/(19.0+11.8+9.7) = 7.62
Ex-Net Cash Price / Average of Past 3 Years' PAT:
(103-34)/(19.0+11.8+9.7) = 5.11
P/B:
103/119.4 = 0.86
(based on latest book value)
As always, depending on your expectation of KC's future earnings, its present valuation will either be cheap, fair, or expensive.