Kingsmen Creatives, the design and production group in Asia Pacific and the Middle East, announced a 1.1% y-o-y rise in net profit to $15.1 million on the back of a 2.8% y-o-y fall in revenue to $235.2 million for the financial year ended 31 December 2010 (FY10).

What I am about to post here is just a brief summary of my thoughts on Kingsmen's FY 2009 results based on a cursory glance at the financials. A more detailed analysis will be posted on my blog in due course (along with my Analysis of Purchase):-

1) FY 2009 revenues had increased 27%, but gross profit only increased by 1.7%. This was mainly due to gross margins falling from 30.7% to 24.6%, as a result of the higher value but lower margin Universal Studios Contract which was awarded to Kingsmen. If we look to 9M 2009, revenue was S$151.6 million, and gross profit was S$40 million. This would mean 4Q 2009 generated sales of S$90.4 million, with gross profit of S$19.5 million, which indicates that 4Q 2009's gross margin was just 21.5%. This quarter saw a lot of recognition of the Universal Studios Project, and so was responsible for dragging down the overall gross margin for the Financial Year.

2) Notwithstanding the fact that gross margins had weakened, net profit attributable to shareholders actually increased by 5.1%. If you compare it to the 1.7% increase in gross profit, this shows better expense control. Indeed, staff salaries and expenses increased by just 9.4% compared to the 27% increase in revenues, and other expenses and depreciation actually decreased.

3) Net profit margin was 6.2% against 7.5% a year ago, and this was mainly impacted by the weaker margins from Universal Studios, it being a large component of revenues for FY 2009. However, I checked Pico Far East's Interim Report for 6 Months ended April 30, 2009 (they have an October 2009 year-end); and their net margin was only 5.76%. We are talking about the Market Leader in the industry and Pico are at least 3 times larger than Kingsmen; yet their net margins are lower than Kingsmen. So by doing such a comparison, Kingsmen margins would seem respectable.

4) ROE may have dipped to 28%, but granted we are looking at an increasing equity base every year (the denominator is increasing) and it gets progressively harder to increase earnings by the same % to maintain high ROE. As mentioned, FY 2009 was impacted by lower margins so the increase in net profit was not enough to offset the increase in equity base; hence the drop in ROE. By itself, 28% is still a very respectable ROE and please remember that Kingsmen is in a Net Cash position; thus the ROE does not stem from debt at all.

5) I believe the reason for Kingsmen clinching the Universal Studios Contract was not because they were facing intense competition and had to under-bid below the market norms; but if you read more carefully into the press release and associated MD&A, their experience in successfully completing Universal Studios opens the doors to Thematic and Scenic Works which is a new business division and potential future revenue stream. With this knowledge, they can now bid for theme park projects in South-East Asia, of which a few are coming up. Hence, I see this move as a catalyst for them to garner contracts in future, and to expand their capabilities, competencies and knowledge base for the long-term. The temporary dip in gross margins will be compensated by the long-term benefits of taking up this contract.

6) Moving over to the Balance Sheet, it does appear that Trade Receivables jumped by a lot from S$41 million to S$75.7 million (an 85% increase). This is against just a 27% increase in revenues. However, Note (f) in the Financials mentions that a proportion of the Receivables relates to unbilled revenues; meaning work was completed, revenue was already recognized (based on accounting concept of % of completion), but the invoices were not billed as at year-end and no cash has been collected yet. Therefore, I conclude this is a timing difference. The associated cash flow impact can be seen as a -ve S$35.2 million cash outflow in the Cash Flow Statement.

7) Loans and borrowings remained low at about S$1.3 million against a cash reserve of S$22.8 million, and the Group is in a net cash position of about S$21.5 million. The business has generated decent returns without significant gearing and without the need for huge amounts of working capital.

8) In the Cash Flow Statement, if we take into account the fact that the collection from Universal was a timing difference, then operating cash inflows should higher than the stated S$1.4 million, and FCF should be present as per FY 2008. The fact that the Group is proposing a 2-cent per share dividend, up 33% from last year's 1.5 cent per share, shows that there is little risk of the trade receivable being uncollectible; and hence not much need for any provision for doubtful debts which may further impact the Income Statement.

9) Their order book is expected to grow slowly but steadily, and the recovering economy and soon to open Las Vegas Sands will bring more opportunities for the Company to clinch contracts. Kingsmen has enough clout and reputation to command decent gross margins even though competition is present from Cityneon, Pico Far East and Design Studio (for fitting out). The Company has been around for 34 years and thus its reputation alone plus its high quality is an intangible asset which would help it clinch more deals.

10) With the prime Orchard Belt undergoing further upgrades amid a plan to revitalise the shopping centres there, there will be more opportunities for Kingsmen to do Fitting Out work; while their expansion in India, China and Middle East are steadily gaining traction and should show +ve results in 2-3 years.

Just my 2-cents.