I have sold half my Kingsmen shares and may eventually sell the other half so I won’t be including Kingsmen in my scorecard for consistency.
Kingsmen reported fourth quarter 2019 results this week and the results suggest that my thesis was wrong for a few reasons. First, NERF did not drive revenue growth. I was looking for NERF Marina Square to drive revenue growth but that didn’t happen.. Revenue for the fourth quarter of 2019 fell 16% year on year to SGD102 million and the company reported a SGD1.4 million net loss. Exhibition & Thematic revenue fell 16% while Retail & Corporate interior revenue fell 11% year on year. Secondly, the company suspended its final dividend probably because the COVID-19 virus outbreak would shrink demand for events, trade shows and retail projects. Without a dividend, I won’t be paid to wait for a recovery. Lastly, net cash is shrinking so my margin of safety is becoming smaller. Net cash is down to SGD32 million in end-2019 from SGD60 million in end-2017.
Don’t get me wrong. Kingsmen has a good chance of surviving the downturn. First,the company has secured SGD140 million of contracts – up 35% year on year. Kingsmen also has a decent chance of winning some big theme park jobs involving the expansion of Resorts World Sentosa. Second, at least half of the company’s labour cost base seem to be variable costs (part-time/contractor employees) so the company has the flexibility to reduce part of their labour costs. Their 2018 defined contribution plan contribution was SGD4.3 million – using Singapore’s 17% employer contribution rate – full time staff salaries amount to SGD25 million or around half of their labour costs. Lastly, the valuation is cheap. Kingsmen is trading at 0.49x book value and net cash amounts to SGD0.16 per share so someone could eventually buy out the company. These reasons for holding on to Kingsmen are valid but different from my original thesis so I decided to lock in this painful loss. After including dividends, the loss works out to 44% assuming I sold all my shares at the last price on 28 February 2020.
This whole experience has taught me to limit investments in companies with lumpy revenue or cyclical industries. I intend to focus more on quality stocks with recurring income and a decent moat.