Kingsmen – Let’s Be Rational

Kingsmen Creatives has been embroiled in financial abnormalities involving two subsidiaries, Kingsmen Kingsmen Beijing Co., Ltd and Kingsmen Exhibits Pte. Ltd. A statement was released by the company yesterday morning at 0725 after four days of trading halt. The case has since been reported to the Minister of Finance according to the Companies Act, by the external auditors of the company. Commercial Affairs Department has also been notified, by the Audit Committee of the company. In this post, I’m not going to have a re-hash of what had happened. You can grab hold of today’s Business Times and read the article entitled “Kingsmen caught up in allegations of financial irregularities” for an easier understanding of what had happened. This post will touch on my own thoughts surrounding this saga and also include some of what was reported in the Business Times article. Such occurrences test our fortitude as investors and I’m taking it as a positive experience for me to grow as an investor.

During the days leading up to the announcement, many were predicting that there would be a buy-out of the company by another company since Kingsmen is a company with excellent track record, fundamentals and business prospects. However, it turned out to be something on the other end of the spectrum. Something not very well-received by the market – financial irregularities. The stock price of Kingsmen plunged once trading was lifted yesterday to a low of $0.695 before closing at $0.725. This was a drop of 8.8% compared to 11th January’s close (the last trading day before the long halt).

Just like any negative news, people’s reaction will be, “Sell first, think later!”, hence the plunge in stock price. Rationality and logic are most often thrown out of the window during such instances. (That is why Efficient Market Hypothesis does not hold water!). During a mass exodus from the market, great opportunities are usually presented. Warren Buffett once said that, “Uncertainty is the friend of the buyer of long-term values.” We should ignore the cacophony and rationalize if we have an opportunity, amid this uncertainty.

Kingsmen as a whole is not fraudulent. Senior management did not know about the personal guarantees and they were not involved in the incident. The two employees who had given personal guarantees were too eager in their job. They wanted to look good themselves. No money from the company’s coffers was put into their own pockets so there was no misappropriation on their part. Kingsmen also had to make advance payment as it had lots of jobs to carry out and also in my opinion, to maintain a good working relationship with them. I think this saga happened during the initial phase of Universal Studios Singapore project where many parcels of projects were won by Kingsmen and they were huge projects. If the subcontractor stops work suddenly, Kingsmen will be affected drastically.

I’m happy that this incident was found out and reported as this incident also serves as a warning to other potential perpetrators. The internal controls of the company will be tightened further as said in the company statement – “The Board will be appointing a reputable international accounting firm to conduct a complete review of the Group’s internal controls and to develop a comprehensive Group Risk Assurance Framework to enhance and strengthen the Group’s internal controls and risk management.”. Going forward, I’m sure Kingsmen will be more prudent. No key employees were reportedly sacked and thus, does not impact Kingsmen’s provision of services in the future.

Benedict was also dejected that this has happened to Kingsmen. He said in the Business Times article, “We have to work hard and take action to repair this setback.” Those are strong words. I believe in Benedict and I’m sure he will set things right. From my interactions with him during the Annual General Meetings, he seems to be a person with integrity. He is also a major shareholder of the company and being the founder, he will not let things go down the drain so easily.

Always remember that businesses involve risk and no business is perfect. When investing, we always have to have a long-term view of the market. In a book called “Don’t Sweat the Small Stuff”, the author mentioned to see a “problem” in terms of five years into the future and think, “Will this really matter five years down the road?”. I believe the long-term prospects of Kingsmen are still intact. The company has had a strong working relationship with its clients. The order book is strong and I don’t think it will be affected by this issue.  Kingsmen is vying for many theme park projects in the region. The MICE industry in Singapore is still bustling with activities. Orchard Road revamp is still ongoing with new shopping centres coming up. More suburban malls are slated to open to transfer the crowd from Orchard Road. Clients like Robinsons, Uniqlo and H&M are expanding. If I were a client of Kingsmen, I would not be too concerned about the financial irregularities but rather be more concerned about the quality of project done by Kingsmen and whether Kingsmen upholds what it promises. More quality clients coming on board lately is a testament that Kingsmen has been doing an excellent job for its clients.

Going forward, with CAD’s investigation, more stories can unfold. Who knows, the investigation may possibly open up a Pandora’s box of more fraud that were covered up. That’s the worst case scenario. The stock price most probably will take a bigger hit if that materializes (remember the earlier axiom of “Sell first, think later”?).

At the current price of $0.725, the dividend yield is 5.5%. With a steady free cash flow so far, solid business fundamentals and rosy future prospects, I believe the dividend yield on cost will only go higher. Investors can also look for a larger margin of safety of say, 6.6% dividend yield, to provide some room for error in judgment. “A great investment opportunity occurs when a marvellous business encounters a one-time huge, but solvable, problem.” – Warren Buffett. I strongly believe this is a one-time temporary event and it’s a great opportunity to take advantage of.

In conclusion, as investors, we need to have a long-term outlook in the market. Always remember that investing is most prudent when it’s business-like. Analyse a set-back rationally and we can discover opportunities. Yes, I understand the eminent CAD investigation sounds scary. It’s unlike other one-time events like earnings misses, product launch failure, etc but I believe Kingsmen will emerge stronger from this. Mr Market has become manic-depressive, are you going to take advantage of it?

P.S. Please exercise due diligence. The above are merely my thoughts. I may be biased as I’m a shareholder.

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