Everyone should be glued to the track running of the presidential election in today’s market, which Trump eventually won, hence there are little focus on results elsewhere.
Anyway, it’s been a while since I last reviewed my position on Kingsmen, so thought I will do a quick throw on my thoughts.
- Q3 is generally not their strongest quarter, which is why you can see that the bottomline is barely positive.
- Gross margin has dropped to 23% and while the drop may seem small, it signifies the case where they are in a very competitive industry operating in a difficult environment at the moment. Though, I still believe they have a moat in the business and operating in a difficult and competitive industry is not easy to swallow.
- Order book demand are still strong and you can see this in their secured contracts to date at $338 million, so I don’t see any drastic white flag yet.
- Staff Costs and Rental Costs are the two overhead costs that contributes the highest.
- They have been mitigating the staff costs through natural attrition and through the use of contract staff. They have also linked their performance bonuses to the state of the company performance. That’s as much as they can do and I think it’s good to see them take action on it.
- Rental costs are about $4 million in a year, when their new HQ is ready in Q4 2017 / Q1 2018, this will directly improve their bottomline.
- Associate losses - Still struggling from some of the associates and the divestment of the C.M.T.I last year affected the associate profits.
- Net margin is currently extremely tight at the moment, but it’ll get better.
- Depreciation costs is high at the moment due to their acquired factory in Malaysia in 2015. It will only get higher once their new HQ is up and running. Please however do note that this is a non-cashflow item. Cashflow is not affected by this, except the construction costs incurred at the beginning stage mostly.
- They are expected to recognize $317 million revenue in FY16, which translates probably to about $11 million npat (assumption: 3.5% net margin).
- In terms of valuation, a $11 million npat would translate to about 5.6 cents EPS, which then is about an earnings yield of around 8%.
- The NAV stands at about 54 cents, and majority of this is due to the net cash they have and the trade receivables as well as buildings. For a service industry, I think the services at this moment are priced in very cheaply and almost non-existent at current price.
In summary, I think a lot of the bad news have been priced into the share price, unless further development surfaced which I will monitor in the next few results such as worsening of gross margin or lacking of contracts won. It's a keep for me for now.