What Does Kingsmen Creatives Ltd’s Latest Acquisition Mean for the Company?

Kingsmen Creatives Ltd. (SGX: 5MZ) announced this week that it would be purchasing the land of its current production facility located in Senai, Johor Bahru, Malaysia. The RM$35.0 million purchase will be funded through internal resources and bank borrowings. What does this acquisition mean for Kingsmen Creatives?

Details of the deal

The property in question is currently owned by Fujiplates Manufacturing Sdn. Bhd. and has a land area of 37,104 square metres and a built-in area of 14,690 square metres. Over the past few years, the land has been leased by Kingsmen Creatives from Fujiplates for use as a production facility.

New commitment

This deal signifies a new commitment from Kingsmen Creatives as the Senai plant will become its permanent manufacturing base.  The factory will become the main manufacturing hub for the company’s international clients in Europe and the US.

The manufacturing facility allows the company to consolidate its operations and perhaps provide more flexibility to expand its capacity in the future. From Kingsmen Creatives’ latest quarterly report, it still has a net cash position of about S$62.0 million – this should allow the company to easily cover the cost of the land purchase.  

Cost pressures

Kingsmen Creatives’ top-line is still growing strongly. In the first half of 2014, revenue actually grew by 11.8% year-on-year. However, the company had faced much higher costs, resulting in a 20.1% decline in net profit for the period.

With the new purchase, the company might be able to save on the operating lease expense it is currently paying for the factory. As long as the additional interest charges from the bank borrowings used to finance the purchase is lower than the cost savings coming from the removal of the operating lease, the company is likely to see better operating profit margins going forward.

It must be noted though, that the net effect of the land purchase on the company’s income statement might still be minimal.

Foolish Summary

Apart from the potential financial impacts, the land purchase might actually allow investors to catch a glimpse of the company’s longer-term future: The commitment made by Kingsmen Creatives to purchase the land might signify management’s confidence in the prospects of the company.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any companies mentioned.