Kingsmen – Stable Growth Fuelled by Competent Management

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The following is a guest post by Tan Si-Rong. Si-Rong is a retail investor with close to 10 years of experience trading in Singapore equities. He has worked in UOB-Kay Hian as an Equity Sales Dealer and at Singapore Tourism Board as an Assistant Manager, specializing in the Meetings, Incentives, Conferences and Exhibitions (MICE) sector.

History

Founded in 1976, Kingsmen is a communication design and production company that specializes in the following business segments; Research & Design, Retail & Corporate Interior, Exhibitions & Events, Thematic & Museums, and Alternative Marketing.

Growth since IPO

Since Kingsmen’s successful public listing in 2003, its stock price has risen to four times the IPO price of SGD0.195. The same can be said for its revenue; from a mere SGD60 million back in 2002, it has increased steadily to SGD260 million in 2011 due to strong demand for Kingsmen’s services in growth markets such as Greater China, India, Middle East etc. Till date, Kingsmen has handled many large-scale projects such as Universal Studios Singapore (USS), World Expo Shanghai, LVMH boutique stores etc; all adding credentials to Kingsmen’s ability to provide quality services to clients.

Founders and Philosophy

The success story for Kingsmen thus far can be largely due to the two founders of the company, Executive Chairman Benedict Soh and Group Managing Director Simon Ong. Both of them feel strongly in the need to constantly engage clients with total experiential solutions, and delivering excellence in all things that Kingsmen undertakes. The company’s name is also derived from this ideology, in view that the staffs are the “men” who serve the customers, who are regarded as “kings”.

Both founders of Kingsmen are true believers in the power of synergies. While Benedict, who was recently awarded the Lifetime Achievement for Outstanding Contribution to Tourism award by the Singapore Tourism Board, is the one who possesses business acumen. Simon, on the other hand, is the one with both the designing brain and creative juices in him. Together, they see the need to constantly broaden earnings base, enhance capabilities and expand key accounts and client to ride on the growth opportunities presented to the company. Together, they teamed up to shape what Kingsmen is today.

Outlook

Despite the challenging global economic situation ahead, Kingsmen should be able to continue doing what it does best; and that is to provide value-added services, and enhance the experience of all clients, without affecting bottom-line. The air of optimism can be attributed to the strong pipeline of projects, such as Hong Kong Disneyland extension, Sotheby’s Visitors Centre and Offices, Marina Bay Sands (MBS) and USS extensions etc, which will keep Kingsmen busy for now. Kingsmen may also be tendering for thematic projects like Shanghai Disney, and there is high chance that it will be offered the tender, after its successful execution of the Hong Kong Disneyland project earlier on.

With Singapore maintaining its position as the Top International Meeting City for 5th consecutive year by the Union of International Associations 2011 and Asia’s Top Convention City for the 10th consecutive year by ICCA Global Rankings 2011, it will bode well for Kingsmen’s Exhibition and Museums segment, which is also the key growth driver of sales and earnings for Kingsmen.

Fast Forward

My parting words for you? With attractive dividend yield of more than 5%, rising consumerism and booming MICE sector, all things seem to be moving in the right direction for Kingsmen. It remains to be seen if there is any further upside for the stock price of Kingsmen in future.

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Judgement Clouded by Price of Stock?

The price of a stock does not determine how much it is actually worth. For example, Starbucks is trading at around $45 currently. Does it mean that a share of the business is really worth $45? One day the price can rise and the next day it can fall. Does it mean that the fundamentals of the business have changed drastically within the short span of a few days? The price of the stock does not equate to its value. The true worth of a stock is termed the “intrinsic value” and this value can be higher than, lower than or at the current stock price.

If we turn to the media, be it the newspapers or the television, the price of stocks are widely touted and very few talk about the true worth of a business. You also might have heard your friends or relatives talking about how cheap a stock is since it is currently priced at 50 cents, when it traded at $3 just a year ago. They entice you further by saying it is a screaming buy based on this fact alone and by buying, you can make five times your money if it goes back to $3!

However, focusing on stock price alone is not how investing should be done. We should approach investing from a business perspective and for us to do that, we have to cut off the stock price from the business when we are researching.  To help us in this, we can literally think of taking a scissors and cutting off the link between the business and the stock price. Also, thinking that the business is a private one instead of a public listed company will help us not to be focused on the stock price. This is because a private business can only be analysed as a whole without the daily fluctuations of stock price, which is characteristic of a public listed company. From my understanding, when Warren Buffett analyses a company, he looks at the fundamentals of the business first and looks at the stock price right at the end. This allows his judgement not to be clouded by the price of the stock.

How do we approach investing from a business perspective? One should analyse the competitive advantage of the business, the financial statements of the business, the competence of the management and whether the business is undervalued. (All these are covered in my other blog posts and they can be accessed from the “Value Investing” category on the right.) By having a business approach, the analysis of the business would not be hampered by the stock price and we are able to make a sound judgement. We will make lesser investing mistakes too.

On top of that, in investing, we need to have long-term view of five to 10 years. Businesses take time to grow and they do not flourish overnight. When we invest in a business, we have to think that the stock market will be closed for the next five years and that our entire family fortune depends on this company doing well. With this mindset, we will go rarely wrong when investing.

Personally, I too have had my judgement clouded by the price of the stock at times. When this happens, I need to remind myself that I am investing in a business and not speculating. Benjamin Graham, the father of value investing, once quipped, “Investment is most intelligent when it is most businesslike”. It is a powerful quote to reflect upon. Approach stock investing as investing in a business and half the battle is worn. The other half of the battle is analysing the business.

Coffee with FFN and Thomas Engle

Thomas Engle is a seasoned investor with decades of experience in the stock market. Around 1998, he joined The Motley Fool (TMF), posting research on their boards. In 2004, he was hand-picked to work for them and is one of the five analysts chosen for their Phoenix portfolio, which is part of TMF’s Supernova newsletter. In the TMF boards, he is known as TMF1000.

FFN: At what age did you get started in investing? 

Thomas Engle (TE): I started investing when I was 12. My first stock was Combined insurance Company.

FFN: How did you get interested in investing and who inspired you to get started?

TE: My parents and grandparents were investors. My parents thought it was very important to learn how to invest early. They bought me a subscription to the Wall Street Journal and they made investing fun for me. Both my grandparents and parents invested in Combined Insurance and did well, so I decided to buy that one too. But after that, my parents wanted me to pick my own stocks, not copy their investments. So, I started reading the Wall Street Journal, choosing Motor Club of America as my second stock.

I still wasn’t being very original since Motor Club of America was an insurance company too. My next choice was Disney, so I finally invested in something that interested me and that I understood.

FFN: What was your life like before investing and how is it now?

TE: I was 12, so my life was pretty good. I invested fearlessly since I knew my parents weren’t going to kick me out of the house if I lost my meager amount of money in the stock market. But even that taught me a very important lesson. One should invest fearlessly; those that don’t are more likely to sell when markets are falling – the very time they should be buying. I am still an investor and if I had never invested my life would be very different and not in a good way.

FFN: How do you choose which stocks to invest in? 

TE: Although there are some exceptions, when I buy a stock I must believe it will be relevant for decades. I want a long track record of success, though I will invest in stocks with shorter track records if I understand the business well. For restaurants a few years of success can be enough for me to pull the trigger if I like what I see.

I don’t worry too much about valuation (covered more in the next question), since I plan on holding for decades and adding to my positions at better and better value points over time. My main focus will be on the business and trying to identify reasons to believe the company can grow for ten years or more. I found, even if growth is modest, a company with staying power will give me opportunities to exploit value regularly over the years.

After I initially invest in my companies, I keep studying them. I believe one of the greatest benefits of being a long-term investor is the education. I will learn about my companies for decades. I seldom sell entire positions. As I accumulate knowledge about my stocks I learn to trade partial positions successfully generating income to expand my portfolio. By trading only partial positions in companies I understand the best; it helps me to develop a strong short-term strategy. Companies tend to trade in logical ranges when those ranges are based on metrics rather than the price of the stock. And exploiting those ranges becomes easier as you learn more about the companies over many years.

FFN: I have heard from my friends who frequent the TMF boards about your cutting-edge valuation process. Could you tell us more on how you value companies before purchasing? 

TE: Initially, I focus more on the business but I want strong fundamentals. I seldom invest in companies losing money unless I am very sure the business has great potential and they are likely to exploit that potential. I feel there are just too many great companies with strong fundamentals and great potential to invest too much money in those losing money. However for my initial position, valuation isn’t a big concern to me. If I worried about valuation, I would have never invested in CMG which has been a good winner for me, but has never sold at valuations that would be considered cheap.

Let’s say I identify a company with great potential and has excellent net income. But the PE is very high because I am not the only investor that noticed its potential – then I buy some anyway. I then try to add more at better and better value points. I do this rather than wait for a better value point because I have seen too many cases where a high PE goes from high PE to higher PE for many years, or just from high PE to high PE while net income is going up. The PE never gets better but the price soars, so I believe its important to get some money invested as soon as I identified the great businesses. I feel there will always be time to buy at better value points or at greater margins of safety.

I think a high PE or low cash flow yield always means the investment is going to be a bit riskier. So its important if you invest in a company with a high PE or a low cash flow yield, you invest less and attempt to build a position over time to mitigate some of that risk.

If I buy a stock at $40 (earnings per share $1.00) so the PE is 40 Almost in all cases that is high. However if I believe the company can grow for decades because it has a great business that value may be OK. As time passes,  the PE can stay around 40 while the price goes up at the rate of earnings growth. An investor can still add to winners, but by using a greater margins of safety as it relates to past purchases rather than at better value points, an opportunity that may not occur.

For instance, lets say my $40 stock goes up to $80 at the same time earnings have gone up 100% too, the PE ratio is the same. So now my stock is at $80, but the earnings are $2.00. So the PE on my original purchase is not 40 but 20. This creates a safety net for my previous purchase making it safer to add to my winner. If the markets fall I can still lighten my position at a profit and reinvest it back at a later date.

If one had invested in BWLD in 2006 at its highest price, the margin of safety was so high by 2008/2009 recession that even the Great Recession did not touch the principal invested just two years earlier. I can’t stress the importance enough of investing over time striving to find the best businesses and investing in them at multiple points at better and better value points or at greater and greater margins of safety as it applies to past purchases. The latter will help us invest a bit safer when we are investing in our winners that give us few opportunities to buy at bargain prices or better value points. And I think it is very important to add to our winners regularly too.

I want to identify great businesses. I want strong fundamentals. But if the metrics say its overvalued, I still want to buy them and then I can worry about adding more at better value points or greater and greater margins of safety as it relates to past purchases over time.

FFN: What are some of the stocks in your portfolio currently?

TE: I own BWLD, CMG, BJRI, PNRA (my favorite restaurant stocks), Amazon, Middleby, Apple Computer, Google, Priceline and Starbucks among many others.

FFN: What are your key considerations in asset allocations for your portfolio across many seasons? (question contributed by a fellow investor, Chin)

TE: I mostly own stocks. In my portfolio I keep no more than 20% in cash and I do my best to never let it go below 1%. It averages about 14%.  I do own several dividend paying stocks which I feel are very safe. Though I am 57 years old, I don’t feel the need to be too protected. Because I own mostly stocks that have very good fundamentals, I feel they are very safe.

The Great Recession proved that all stocks can go down 50% or more, but I didn’t lose any stocks to bankruptcy during that period. I just never felt stocks were that unsafe, so as I grow older, I don’t plan on changing the way I allocate money. At the bottom of the recession my cash in my portfolio fell to about 1% – so I still invest fearlessly.

FFN: How much emphasis do you put on the capability management teams? (question contributed by a fellow investor, Chin)

TE: I always felt it very hard to measure the value of a company’s management team. There are CEO’s that I liked a lot.  W. Clement Stone wrote “Success Through a Positive Mental Attitude” and he was the CEO of my first stock – Combined Insurance Company. Mr. Stone was very charismatic – the Tony Robbins of his day.

I believe Howard Schultz of Starbucks has proven himself a great CEO. When I purchase a company I like to think anyone could run it – so for me I still focus on the business more than management, but once I learn about them over the years I feel I can then value the management team better.

I find the same man can be given all the credit in the world when his stock is on top, but if the stock price falls, the same management team has to field a lot of blame. The Greatest CEO in the world probably couldn’t save a bad business, so I focus on finding the best businesses. It’s icing on the cake if it also has a good CEO. I tend to skip businesses in industries where high compensation is the norm because they benefit, but investors seldom do. I want to get paid too, so I tend to avoid companies with high compensation packages, regardless of their perceived potential.

FFN: How do you identify growth hooks for the long-term? (question contributed by a fellow investor, Chin)

TE: With restaurants it is very easy. If a company, whether its retail or a restaurant, has grown in the U.S successfully for the first few years and are still in just a few states that is an easy to identify growth hook. So regional chains going national is one important growth hook I try to find.

I purchased Walmart first when they were in about 1/3 of the U.S. They were reporting great reports, so I figured, they would do just as well as they entered the latter 2/3 of the U.S and then they could also expand throughout the world.

But after retail and restaurants spotting a growth hook is much harder. When I purchased Apple it was because I kept seeing MACs taking market share from the PC year after year after year. It was trend I figured could continue. And they just kept coming out with great new innovative products. Strong trends don’t change overnight. So I tend to look for trends in my reading and once I invest in them, I stay in them. I am very slow to sell long-term positions opposed to trading positions. I have traded partial positions in Apple, but most of my shares are for the long-term and when I do generate cash flow from such trades, I plow it back into Apple, expanding my position. I do this with most of my stocks once I learned enough about them to be comfortable with their trading ranges.

FFN: You often use a company’s price-to-earnings (PE), price-to-sales (PS) and price-to-free-cash-flow (PFCF) over long time periods as quick estimates for valuation. How do you determine if a company would start to trade at a low PE permanently instead of rebounding to a PE that is closer to its historical norm? For example, Coach is now at a PE of 15 but from your page post notes, a normal range for Coach would be 20-25. What are some good ways to tell if the market would value Coach at its historical norm for PE, rather than the lower PE of 15? (question contributed by a fellow investor, Ser Jing)

TE: Sometime you can’t know for sure. I believe people should diversify their retail holdings. They traded at 5.67 PE during the Great Recession. But the Great recession was more of an anomaly. We can expect it to happen regularly. But there are other events, minor but still very important events. For instance, when the Dow dropped to 10,367 to bottom on October 4, 2011, Coach traded at a PE ratio of 15.65. European fears hurt the Dow and Coach’s stock then. Europe today is still a source of fear even though it’s not hurting the Dow that much so far. Back in 2011, Coach was still growing sales by 17%.

In the latest quarter, sale grew only 11.9%, so the price dropped. Could this be a new range for them? It could be. What I want to do is find reasons that make me believe they could jumpstart growth again. Sales in China grew 64% for them, so that encourages me to think at some point, they will grow again. I think China is a big opportunity for them and Europe won’t be forever in trouble. I feel sure things will improve for Europe in time. In five years if China proves a big opportunity and Europe strengthens, Coach’s PE is likely to expand again. We are still in a secular bear market and have been since 2000, PEs are going to be as high as they will be in a secular bull market.

What could create another secular bull market? I think a cheap source of energy. If the U.S transitions to natural gas for cars it would create many new jobs and end our dependence on oil. I think that would create another secular bull market which could last for many years. And PEs would expand.

Coach’s North American sales only grew 5%. We can consider if this is a maturity issue or we can worry about competitors. Or the demographic that buys Coach’s products could be negatively affected by unidentified factors in the North American economy. And to know for sure will take more than a few quarters.

For the same period that Coach reported 5% sales growth in the U.S, Michael Kors grew 64%, but from a much smaller base. I am sure that caused some fear too. As long as Coach is growing net income I believe they will do fine and the PE is likely to expand again. I don’t overly worry about PE contraction or expansion – I just focus on net income and cash flow growth. If they grow the value of my investment will be improving and at some point the price will reflect that growing value.

FFN: What are the mistakes you have done pertaining to investing and what are the lessons learnt?

TE: I think my biggest mistake was deciding to liquidate most of my stock holdings to buy mutual funds in 1995. I wanted to coast, not worry about portfolio management. The returns were so bad, I quickly decided to sell my funds and rebuy stocks – something I did over the next several years. I now own no mutual funds and I am sure I never will again.

Part of my decision to go back to stocks was The Motley Fool. For the first time in my life I was able to talk about investing with tens of thousands of people who were very passionate about investing. The Motley Fool boards also gave me access to information I never could have gotten so easily from any other source. It was truly investors writing for investors and it made it easier to find great stocks for my portfolio with far less work on my part.

I learned two valuable lessons. One no one cares about your money more than you. It is worth spending some time studying to invest one’s own money. And if one has like-minded people to share research the time spent studying to create a successful portfolio is cut to very low levels.

FFN: What psychology do people need to succeed in investing?

TE: They can’t be afraid. If one’s investments cause them fear, they have invested too much. Fearful people sell when they should be buying. The Great Recession was very scary, but it was also the best time to buy stocks since the bottom of the 1973/74 recession.

When I started to invest I was 12, so I had no worries my parents were going to take care of me regardless of what the markets did. The best way to duplicate the fearlessness of a child is simply invest less. Invest small amounts and invest more at better and better value points. Invest that way through one recession and you will never worry about recessions again. They won’t be an object of fear. They will become periods of opportunity.

FFN: How has the investor in you evolved over the years?

TE: When I was younger, pre-Motley Fool days, I had to depend on my own research. Today I share my research with others and they share their research with me on the boards. And from that I can quickly find great stocks that I consider today’s and tomorrow’s super stocks. More importantly I find them earlier in their growth cycles because of the help I get on the boards. So depending on collective research is one point of evolution and using the cash flow statements which wasn’t available when I was young was another. Again the Motley Fool boards and TMF helped me understand how to use the cash flow statement quickly and using the cash flow yield equation has become a very valuable part of how I value companies.

FFN: What advice would you give for beginners who want to start investing?

TE: Go slow. One shouldn’t invest a lot of money immediately. One of the biggest mistakes I have seen is new investors who saved money for many years and decades decide they are going to invest it now in stocks in too narrow a timeframe before they gain the experience to do it well. Investing over time, allows one to learn and gain experience. It keeps investors from being at the mercy of the market. Those that invest too much money in too narrow a time frame risks losing in the short-term if the markets go down and then getting discouraged. If they get discouraged they are more likely to sell for a loss and quit investing.

FFN: What do you thing is the biggest misconception people have about money?

TE: In my opinion the biggest misconception is that it takes a lot of money to build a successful portfolio that will take you to the next level of affluence. I believe people don’t realize just how large small amounts can grow if invested regularly in a group of strong businesses at better and better value points and holding those positions for the long-term.

FFN: What is the one thing, in your opinion, do people need to succeed in investing?

TE: They should never give up. No matter what the markets throw at them, they should never give up and they should keep learning. So not to get discouraged, they should start slow with small amounts of money, so if they make some mistakes it won’t discourage them which could cause them to quit investing. Time will make up for many mistakes – another benefit of long-term investing. The longer they invest the more experience they gain and their decisions will improve over time, so that the market becomes very simple – not so much a mystery.

FFN: What are the habits one must follow to have a sound financial life?  

TE: One should invest regularly. Even if one can only put together $50 per month, make sure you do it. Small amounts can grow into very large amounts over time.

Try to allocate some time every month to study stocks and strategies. And make sure you take notes on anything that seems like a good idea. I regularly take notes, my page posts are my notes. I learned if I didn’t write it down, I would forget why I liked a stock and it was like starting all over again and that wasted time. I found if I take notes, write my own personal, never to be published book, my strategies and stock picking abilities grew and improved very quickly.

Share your research with others. When I started to do this on the TMF boards, people would offer up points I missed. They many times corrected my reasoning. Now some people don’t like being corrected – I personally liked it. The feedback helped me develop a better way of investing. I learned more in my first five years on the TMF boards as I did in my previous 30 years investing on my own.

Once you start investing, every quarter, you should take out some time to study your portfolio. What did well? What did poorly? What could I have done to boost returns? The great thing to this exercise is there are no wrong answers. It is better to theorize every quarter and then allow time to test those theories. I think it improves my investing decision as the years pass. It keeps me regularly improving.

FFN: Can you sum up your investing philosophy in 10 words or less?

TE: Long-term investing; exploit accumulated knowledge and better value points.

FFN: How about a parting shot for the readers?

TE: The market has always been volatile. When I started to invest, I was fortunate not to have a lot of money to invest. We were about to go into a deep recession and a long secular bear market. Commissions were about $120 minimum with a percentage tacked on to that. But there were no discount brokers then. It forced me to think long-term. It made me hold my stocks for decades. It made me happy when stocks dropped since I could buy more shares, so I learned to like recessions and bear markets. Because I started out with little money and little experience, I couldn’t lose much. As my experience grew and I made more money, I grew my earnings power along side of my experience.

I worry about those that start out investing with too much money and too little experience. So I encourage even people with a lot of money to go slowly. Ease into your investments slowly over the first few years – gain some experience. Think about buying more at better value points. As time tests your methods, you can always add more money by emulating your successes and avoiding past mistakes. Investing small amounts of money at first will make mistakes less costly. As time passes and you make fewer mistakes, you can always invest much more money.

Learning how to invest well is much like learning how to type. I never understood how the typing of random letters over and over again was going to help me type. But at some point it just clicked, I knew every letter every number and I could type. If one invests slowly, gaining experience, learning from mistakes and successes – the investing becomes easier and soon it’s not scary anymore. It just clicks.

There is an entire industry set up to make you think short-term. They make money if you trade a lot. Long-term investing works, but long-term means it takes time. Bear markets and recessions don’t last forever. So don’t give up, keep learning, invest regularly, and look to add to your positions over time at better and better value points.

Note: All views expressed are Thomas Engle’s and do not reflect that of TMF.