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Kingsmen Creatives Ltd’s Share Price Is Down Some 50% From Its Peak: Is It Time To Bail Out?

Kingsmen Creatives Ltd (SGX: 5MZ) is a communication design and production group that is involved in designing and fitting out of retail shops, among others. Some of its clients include big brand names such as Ralph Lauren, Coach and Fendi.

As of yesterday’s close at S$0.555, Kingsmen’s stock price was just a tad higher than its 52-week intraday low of S$0.545. It’s a scary proposition knowing the company was trading at more than S$1 per share three years ago. What happened to the company for its share price to plummet by around 50% from its peak?

Dwindling profits

The following is a snapshot of its key financial metrics from FY2013 to FY2017 (the firm has a 31 December year-end):Source: Kingsmen Creatives Ltd 2017 annual report

Revenue from FY2013 to FY2017 had inched up from S$296.3 million to S$307.3 million, but net profit has tumbled from S$17.7 million to S$9.7 million during the same time frame. Kingsmen has been facing headwinds in its business, mainly from the slowdown in the luxury retail sector.

Kingsmen’s net profit margin has also been poorly hit, falling from around 6% in FY2013 to slightly above 3% in the latest full year. Amid soft retail conditions, it had expanded into the hospitality, corporate interior, food and beverage, and mall public area segments, which usually have lower margins as compared to the luxury retail sector.

There’s still hope

However, I feel Kingsmen will be able to bounce back from the doldrums. Even though e-commerce is proliferating, many retailers are adopting an omnichannel mode of sales. This means that a retailer has both an online and offline presence.

Even retailers that started as online-only companies are beginning to create an offline presence to capture the physical retail market and create meaningful experiences for consumers. For example, e-commerce retailer Love, Bonito opened its first physical store at 313@Somerset in October 2017. Love, Bonito’s co-founder Rachel Lim, said in a July 2017 interview with The Straits Times:

“A physical store provides a platform for us to enhance our customers’ touch point, provides a space for our community to mingle and learn, enables us to interact with our customers face to face and increases our customers’ brand loyalty.”

The statement above is a testament to how offline shopping would not become obsolete, especially in Singapore.

In February this year, Kingsmen made public that its US-based subsidiary, Kingsmen Xperience, had entered into a licensing agreement with toys and games manufacturer, Hasbro International Inc (NASDAQ: HAS), to create, build, and operate NERF-themed family entertainment centre attractions across the Asia Pacific, including Singapore. The first FEC will open here in 2019.

With the new collaboration, Kingsmen marked its entry into the development and operation of location-based entertainment and an expansion of its business portfolio. Kingsmen can ink such deals with other media or entertainment companies to develop intellectual property (IP) licences, thereby increasing its revenue streams. Yes, operating FECs bring about additional risks to the company. However, when the first FEC is operational and Kingsmen learns the ropes, it should do better with subsequent FECs and IP licences.

At a stock price of S$0.555, the dividend yield is 4.5%. While investors wait for the recovery of Kingsmen’s business, they will still have cash coming into their bank (ka-ching!). The dividend from Kingsmen looks to be well-covered as the payout ratio in FY2017 was 51% (calculated by taking dividend per share divided by earnings per share).

Underlying all the above is Kingsmen’s strong balance sheet, which should help the firm see through the tough times. As at 31 March 2018, the firm had S$67.5 million in cash and cash equivalents, and S$17.1 million in total debt, giving Kingsmen a net cash position of S$50.4 million.

The Foolish takeaway

The father of value investing, Benjamin Graham, once said that in the short-term, the stock market behaves like a voting machine, but in the long-term, it acts like a weighing machine.

In the short-term, the market is punishing Kingsmen Creatives. However, there’s a high chance that over the long-term, things are not as dire.

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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 Sudhan P owns shares in Kingsmen Creatives Ltd.