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1 High Quality and Cheap-Looking Share

The collapse in the price of oil has captured the attention of many investors as it has, at least partly, caused the shares of many oil-related companies to reach really low statistical valuations.

But despite the multitude of statistical bargains which might appear in that space, I would argue that it would be unhealthy for any investor to focus purely on oil and gas shares in their search for investing opportunities. That’s because there would also be other non-oil-related shares out there which can make for attractive investment targets.

We can take Kingsmen Creatives Ltd (SGX: 5MZ) as an example. Kingsmen Creatives is involved with the MICE industry (Meetings, Incentives, Conventions, and Exhibitions) and its business lies in helping design, fabricate, and put in place installations for retail stores, offices, exhibitions, theme parks, and museums, amongst other venues.

A quality share

Over the past decade-plus from 2003 to September 2014, the company has managed to find stupendous growth, with its earnings per share growing more than eight-fold in that period from 1.10 Singapore cents in 2003 to 8.57 cents over the 12 months ended 30 September 2014.

But that alone can’t paint us a complete picture of the quality of the company’s management team and business. To that point, billionaire investor Warren Buffett wrote in his 1979 Berkshire Hathaway annual shareholder’s letter:

“The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.”

Kingsmen Creatives' historical ROE

Source: S&P Capital IQ; data for 2014 is for the 12 months ended 30 September 2014

As you can see in the chart above, Kingsmen Creatives would have passed Buffett’s primary test with flying colours. The firm has earned a fantastic average return on equity of 24.5% from 2003 to September 2014, and remarkably, it has managed to do so with a rock-solid balance sheet that has been carrying more cash than debt all those years.

Where the cheapness comes in

Despite its historically strong earnings growth, Kingsmen Creatives is valued at just 11 times its trailing earnings at its current price of S$0.94. In contrast, the SPDR STI ETF (SGX: ES3), a proxy for Singapore’s market benchmark the Straits Times Index (SGX: ^STI), carries a slightly higher earnings multiple of some 13.5. This makes the company statistically cheap.

But having a low valuation isn’t enough – a cheap share might yet become an expensive mistake if its business is in decline. On that note, investors could perhaps rest easy as Kingsmen Creatives can enjoy some tailwinds from Singapore’s growing attractiveness as a global MICE destination.

According to CDL Hospitality Trusts (SGX: J85) latest earnings presentation, Singapore has won a number of related-accolades recently, including Top International Meeting Country and City and Asia’s Top Convention City. The charts below (click for larger image) also points to some important growing trends taking place in Singapore’s MICE industry.

MICE trends

Source: CDL Hospitality Trusts’ earnings presentation

With Kingsmen Creatives traditionally seeing more than 70% of its clients returning to it for its services, the company seems well-positioned to take advantage of any growth in the MICE industry here.

That’s also not to mention the regular refurbishments which retail brands often go through at their outlets. This could be another potential avenue for growth for Kingsmen Creatives if its clients in the retail industry expand their own businesses. And again, that strong stream of returning clients would put Kingsmen Creatives in a very good position to capture business.

A Fool’s take

Kingsmen Creatives’ quality shines through with a glance at its historical returns on equity and strong balance sheet. As for cheapness, it can be seen in the firm’s low PE ratio and opportunities for future growth.

None of the above is meant to suggest that the company will definitely make for a great investment going forward. But its track record thus far might make it a worthwhile target for further investigation for investors looking for high-quality shares at cheap-looking prices.

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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 writer Chong Ser Jing owns shares in Kingsmen Creatives and Berkshire Hathaway.