Having now read Kingsmen's 18Jan13 announcement, my own views:
1. The amounts involved in the 2 commercial transactions are very small when compared with Kingsmen's overall group revenue, equity and available cash positions. Their combined negative impact of approx. $1.5m to Kingsmen's P&L is also small and clearly manageable.
2. The 2 reported cases concerned some apparent misconduct by employees at subsidiaries level in FY2009 through 2011, and both appear to be isolated cases. I believe such mistakes do happen in fast-moving contracting business, especially in big projects where many employees and outside suppliers or subcontractors are involved in building up something with tough deadlines and making things happen together. As investors we should look upon such mistakes as part and parcel of the business. Quite clearly, going forward such mistakes have to be better controlled within Kingsmen.
3. There is no evidence that Kingsmen's senior management - especially Ben Soh or Simon Ong - are involved in the 2 cases reported.
4. Kingsmen's senior management and AC have carried out detailed corrective actions for the 2 cases - including financial settlement with the related parties involved - including dealing with and responding to E&Y (as the external auditors) and CAD, all within a short 1 week. So they have been proactive in solving the problem.
A relevant question: Will this incident negatively impact Kingsmen's longer term business prospect and investment value? My own humble view is that it will not. In fact, I have not lost any sleep so far be because of it.
investors have over the weekend to digest and thought thru this matter. Let's see how the market will react today
Looks like many people take this opportunity to collect KMC ...
Kim Eng 21 Jan 2013 report on KC
"Fraud found in subsidiaries. Kingsmen has announced that two subsidiaries, Kingsmen Beijing Co. Ltd (KBJ), and Kingsmen Exhibits Pte. (KE) are believed to have committed fraud, and are currently under review. Amount of losses totals at SGD1.46m, and could impact FY12F earnings by 7%, depending on E&Y’s audit assessment. We maintain our positive stance on Kingsmen and believe this is a one-off event. We suggest investors to BUY on weakness"
http://www.maybank-keresearch.com.sg/Research.aspx
Free Publicity
Now everyone will be reading KMC AR and hopefully they see GEM in it.
Ya. Free publicity, no wonder the price rose back above 0.75.
Reiterate... I think the net financial impact should be SGD764k+SGD180+SGD100 and not the publicized SGD1.5million. In fact the SGD1.3m impaired before should also be restated as "Expenses" instead of "Impairment Losses"
This is because as Kim Eng put it...
"The group reassessed values of the works done in this project, and acknowledged that it was equal to the prepaid amount. Remaining prepaid amount of SGD691k, and SGD764k already charged on other projects will be written off on the balance sheet."
(Think through the accounting...) Therefore, since the written off amount should be charged off on other projects, they should be recognised as "OPERATING EXPENSES/COST OF GOODS SOLD" and not "impairment losses".
(conversely, if you think charge them as impairment losses, it means that the other work by subcontractor B were conducted for FREE since Kingsmen did not pay them at all. But of course, Accounting wise it cant be done that way.)
The restatement impact will be a just lower gross margins in 2010 and no impact on equity value.
The key concern I have going forward is NOT with regard to the dimensions of the financial loss of the two "Business Control Incidents" we have read so much about over the last four days - but rather with the reputation damage this episode has caused and will cause for Kingsmen.
A much wiser men than I once said that a company has to build its reputation at the pace of a bicycle going uphill ......... but that very same hard-earned reputation can be lost at the speed of a Ferrari. Some of Kingsmen's key clients highly value their brand and their reputation and, while we can be comforted by the healthy level of Kingsmen's current order book, I believe Kingsmen's management would be wise to be sensitised to the reality that several of Kingsmen's counterparties will be a tad wary of dealing with them going forward. This will be an unfortunate reality.
Personally speaking, I believe Kingsmen's Governance worked pretty well in this case. Having sat on the Audit Committee of a listed company in years gone by, my assessment is that Kingsmen's AC discharged its responsibilities properly and appropriately. I would encourage forummers to read Post # 751 at the top of Page 76 on this Kingsmen thread by gemswizard, who I understand is an Auditor by profession. In my view gemswizard has it spot-on in his/her first paragraph (may be not in his/her second – time will tell and we’ll see!!). Another wise man said "a crisis is a terrible thing to waste"........... and I perceive that, having learned the hard way (and in the most public way), Kingsmen's management is now correctly placing a focus on strengthening their business controls framework etc. This will stand the company in stronger stead going forward.
I believe that Ben and Simon now need to continue what they have been doing so successfully over so many years ......... but in addition they need to a) move rapidly to restore Kingsmen's external reputation in its widest sense (i.e. with all their stakeholders - shareholders, clients, sub-contractors, Government and even their own staff) and b) move decisively to flush out any remaining "skeletons in the cupboard". Apart from the four days it took to craft the SGX Announcement that was disclosed last Friday morning (frankly this was far too long), everything seems to point to point b) above now being firmly in hand. However, my sense is that it is point a) that will determine whether Kingsmen will continue to thrive............ or not. And this will take time – it will be a long hard grind to fully rebuild and enhance the company's reputation and this challenge is NOT fully addressed by a couple of press interviews and two sessions of SGX trading.
My judgement is that Ben and Simon will give this their very best shot ………..and personally speaking, I'm confident that they will successfully deliver on their new additional role as "reputation-restorers in-chief". The key reason I invested in Kingsmen in the first place (like most of my other investment decisions) was based on my perception of the capabilities and the capacities of the management. My positive view of Ben and Simon and their Management Team still holds - to the extent I bought more Kingsmen shares last Friday and today; I perceived it was a good buying opportunity. Time will tell if this decision was correct.
I am in the camp of those forummers who believe a G.O. for Kingsmen is a question of “when” rather than “if” – but I do believe that as a result of the events of last week the “when” is now likely to be further out. For the simple reason that Ben and Simon will not want to bow out until this episode is a distant memory – they won’t want to be remembered for “irregularities”. To make the episode a distant memory the most important thing for them will be to keep delivering record profitability and growth ………… and an enhanced reputation. As regards reputation with Kingsmen's shareholders, I expect them to forego at least part of their annual bonus - and this should apply for management in the business lines where control deficiencies are apparent
Vested. Please forgive my epistle.
(21-01-2013, 08:41 PM)l0nEr Wrote: [ -> ]Ya. Free publicity, no wonder the price rose back above 0.75.
Reiterate... I think the net financial impact should be SGD764k+SGD180+SGD100 and not the publicized SGD1.5million. In fact the SGD1.3m impaired before should also be restated as "Expenses" instead of "Impairment Losses"
This is because as Kim Eng put it...
"The group reassessed values of the works done in this project, and acknowledged that it was equal to the prepaid amount. Remaining prepaid amount of SGD691k, and SGD764k already charged on other projects will be written off on the balance sheet."
(Think through the accounting...) Therefore, since the written off amount should be charged off on other projects, they should be recognised as "OPERATING EXPENSES/COST OF GOODS SOLD" and not "impairment losses".
(conversely, if you think charge them as impairment losses, it means that the other work by subcontractor B were conducted for FREE since Kingsmen did not pay them at all. But of course, Accounting wise it cant be done that way.)
The restatement impact will be a just lower gross margins in 2010 and no impact on equity value.
Frankly a fraud being framed as free publicity is akin to confusing "famous" and "infamous"
Whether it is expense or impairment, the equity value will be impacted through either restatement of FY10 or current year PnL
(21-01-2013, 11:11 PM)RBM Wrote: [ -> ]Having sat on the Audit Committee of a listed company in years gone by, my assessment is that Kingsmen's AC discharged its responsibilities properly and appropriately.
But can that be said of the management?
In the announcement, the letter sent by E&Y was a "confidential" one. Does that mean that the content or even the letter before it was sent was not known to the board/management? If the board/management knew, why didn't it call for a halt on Friday or earlier? And if they didn't, then could it be that the announcement was made from the board/management's perspective? And could that be the explanation for the time they needed to craft that announcement?
The consensus seems to be that the management is innocent. In investing, I believe the approach of "guilty unless proven innocent" is more prudent.