Thursday, 20 April 2017

Kingsmen and Pico - Same Industry, Different Fate

Kingsmen (SGX:5MZ) and Pico (HKG:0752) are both widely recognized as leaders of Asia Pacific's corporate and events marketing field. However, these 2 firms have experienced vastly different fate in recent years.

Pico Up, Kingsmen Down

Source: FT Markets

Fundamentally, Pico has reported increased yearly net income since 2013. In contrast, Kingsmen's income has been stagnating since 2012 before suffering a big dip in 2016. To make matters worse, Pico has outperformed Kingsmen on all measures of returns efficiency.

Source: Google Finance, 2012 till date

Over the course of the long term, share prices inevitably collapse in line with businesses' fundamental performance. As such, it is of no surprise that Pico's share price has outperformed Kingsmen since 2014. Since 2012, Pico has logged a 120% gain in share price while Kingsmen's share price is hovering around 0% gain.

Naturally, Pico is also trading at higher multiples. Pico's PE and PB is around 13 and 2.15 respectively, while Kingsmen's PE and PB trades around 10 and 1 respectively. 

Reasons for Kingsmen's Downfall

Kingsmen was once many value investors' darling. As such, I found it worthy to devote some time towards understanding the reasons for their downfall.

Source: Kingsmen's Annual Reports
NOTE: All segment profits are not consolidated

Here are some points that we can glean from this:

1) While Retail and Corporate Interiors and Exhibitions and Thematic have always contributed the lion's share of Kingsmen's net income, the mix has changed vastly since 2013 with the former decreasing in importance and the latter growing in significance.

2) Kingsmen's problems are primarily driven by the fall in Retail and Corporate Interiors's net income since 2013. This, in turn, is caused by a reduction in profit margins to razor thin levels.

3) On the bright side, Exhibitions and Thematic has reported both increased profits and improved margins. However, worryingly, revenue from this segment fell in 2016.

Conclusion

Much of whether Kingsmen can turn their business around depends on their Retail and Corporate Interiors segment. At present, Kingsmen appear to be hopeful - they are adopting a policy to defend their market share by operating on lower margins.

In general, there is much uncertainty with Kingsmen's fate now. With the digital revolution ongoing, it remains to be seen if the retail sector will ever regain its future glory. Their failure to grow Exhibitions and Thematic's market share also hampers their pivoting strategy. Perhaps most importantly, Kingsmen are undergoing a change in leadership.

As for Pico, they have demonstrated much greater resiliency than Kingsmen in similar market conditions. The fact that they have defended and even grew their margins amidst this tough operating environment is particularly laudable.

I will continue to monitor both companies as I ponder on when to begin dabbling my fingers in foreign exchanges.

Regardless, here is to wishing everyone fruitful investments!

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this blog post be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of Dan O (“the Author”); is merely the written opinions and ideas of the Author, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Author make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Author, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

3 comments:

  1. Nice in looking beyond Singapore borders and comparing the companies

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    Replies
    1. Thank you, hope you enjoyed the read then

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  2. Kingsmencreative gives me the impression of higher cost structure but the value matching I have no idea about. Maybe if the stock price needs to go lower enough for an "OSIM".

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