Thanks RBM for such a concise summary of Kingsmen's 3Q 2012 results. Suffice to say I was rather taken aback at the numbers, for reasons which I will detail below. The headline numbers in the Income Statement do look weak, but as I took a closer look at the rest of the financials I did see some rays of light. Hopefully they will come together to shine Kingsmen's way to glory come FY 2012 results in Feb 2013!
I will not repeat the positive points already brought up by RBM. Instead, here is my take of the positives:-
1) Although 3Q 2012 saw a drop in revenues by 18%, gross profit only fell by 11%; as a result the gross margin for 3Q 2012 improved to 23.2% from 3Q 2011's 21.5%. A rise in gross margin should always be viewed as a positive as it demonstrates the Company's pricing power, and 9M 2012 gross margin also improved slightly from 25.4% to 25.8%.
2) Share of results of associates was also very encouraging, as this contribution represents equity-accounted earnings from Kingsmen Nikko and Kingsmen Korea. Although on details were given, I'd assume an increased level of activity for Kingsmen's associates in these countries contributed to the higher earnings of $1 million for 9M 2012 as compared to just $376k for 9M 2011.
3) Looking over to the Balance Sheet, Trade Receivables fell quite substantially by about $16 million, and resulted in good cash inflow for Kingsmen, with cash and bank balances remaining at $48 million, near the record high of $49.3 million registered on June 30, 2012. Total loans also decreased by $600k from $5.2 million to $4.6 million.
4) The cash flow for 3Q 2012 was not as strong as the first two quarters, registering an OCF of $2.36 million, but the +ve is that FCF was still recorded, with Kingsmen's business requiring very little capex (capex was just $313k for 3Q 2012), resulting in FCF of about $2 million. If we look at 9M 2012, total FCF stood at $23.7 million. Recall that for 6M 2012 FCF was $21.7 million, and Kingsmen usually has a strong 4Q which should see even more FCF coming in. Just to recap - 4Q 2011 FCF stood at just $822k, and total FCF for FY 2011 was $10 million, less than half of what 9M 2012 has already generated.
Note that the cash outflow from payment of interim dividend of 1.5 cents/share (on September 24, 2012) amounted to $2.875 million. Full-year dividend of 4 cents/share amounts to $7.66 million. By observing Kingsmen's strong FCF generation for FY 2012 of $23.7 million thus far, it would not be too far-fetched to assume that the Company might declare a special 0.5c/share dividend on top of its usual 2.5c/share final dividend, as this would cost the Company just an additional $1 million, bringing full year cash outflow for dividends to $8.66 million.
Well, now for the negatives; and I must say the negatives had me thinking about exactly how resilient Kingsmen's business is, and also how "lumpy" the earnings can be as, after all, their revenues are predominantly contract-based, even though 70% of their customers are repeat customers.
1) Interiors Division saw a significant drop in revenue for 3Q 2012, compared to 3Q 2011, of 30%. This makes me question the resilience of the Interiors Division to downturns, and whether the drop is due purely to timing differences (more roll-out programmes in 3Q 2011 as mentioned by Kingsmen) or if there is a fall in demand for Kingsmen's services year on year. The Company also states that "many of the larger projects were completed in 2Q 2012", which means most of the revenues were recognized in 2Q 2012. This makes me question how consistent the roll-out programs are for Kingsmen - are these confined to certain months or periods such as year-end holiday season? If so, then the timing of recognition of revenues would understandably be lumpy. I also note that no mention was made of fixtures export, which is supposed to constitute an increasingly significant portion of Kingsmen's business. It would be helpful if Management could shed some light on how this is performing, and whether there is a year on year improvement.
2) As mentioned by dydx, Kingsmen continues to hire aggressively in many countries, resulting in staff costs falling by only 6.2% in 3Q 2012 while gross profit fell by -11%. The rise in share of earnings from associates could not offset this impact, and it resulted in PBT being lower by almost 20%. Staff costs continue to be a bugbear for Kingsmen as the Company must pay handsomely for talent, even if the contracts may not be coming in. Training and development of staff and incentives to retain talent would also jack up staff costs, not to mention hiring more staff for their new thematic/scenic division which will undertake theme park projects.
3) Again back to Interiors Division, 9M 2012 saw a revenue drop of -10.8% year on year, and I am wondering if Kingsmen is able to grow this division further for FY 2012 and future years. Roll-out programs by existing clients do have limitations in terms of the areas these companies can expand to, and with the economic crisis raging on they would be more cautious in expanding. Unless Kingsmen can confidently clinch new contracts with new clients and proceed to roll out for them, I feel the revenues from this division would stagnate and hit a plateau, which is a big negative for shareholders. Unless Kingsmen provides more clarity on this division, I am apt to feel pessimistic about its future prospects.
Overall, I would still conclude that the positives outweigh the negatives, in terms of FCF generation, possibly lumpy earnings from Interiors and the higher order book of $289 million compared to 3Q 2011 of $254 million. I am unsure if this order book also includes contracts for their smaller R&D and AM divisions, but with the good growth momentum this year we should expect to see a better contribution to bottom line for FY 2012.
Do note, though, that R&D has much better margins than AM; a glance at FY 2011 segment report shows that R&D had a segment profit of $2.7 million on revenue of $8.5 million, for a segment margin of nearly 31.7%. Alternative marketing, on the other hand, generated just $101k of profits on revenues of $8.9 million; but I understand that for FY 2011 there was high depreciation on one of their flat-panel TV screens which resulted in profit being wiped out. Hopefully for FY 2012 the contribution from AM division would be more substantial, and pull up Group NPAT. (Note that no segmental breakdown has been given for 2012 so far in 1Q, 1H and 3Q announcements).
Just for the record, EPS for 9M 2012 was 5.61c/share; for 4Q 2011 the EPS was 8.56c - 5.41c = 3.15c/share. If we add 4Q 2011's EPS to 9M 2012, we will get a FY 2012 EPS of about 8.76c/share. Since order book for 9M 2012 is about 13.7% higher than 9M 2011, assume EPS is also 13.7% higher for 4Q 2012, which will yield a 4Q 2012 EPS of about 3.58c/share.
Therefore, my projected EPS for FY 2012 is about 5.61 + 3.58 = 8.99c/share or about 9c/share. Taking the last done share price of 77c, this represents a PER of about 8.5x (which means Kingsmen is fairly valued, as market leader Pico FE also trades at about 8.5x to 9x PER). Dividend yield based on a 4c/share full-year dividend stands at
5.2%.
My 2-cents worth.
(Vested)