Kingsmen recorded a disappointing 3Q15, with 3Q15 PATMI at SGD0.6m (-84% YoY). We maintain our NEUTRAL recommendation as we trim our TP to SGD0.75 (from SGD0.80, 5% downside), pegged to 10x FY16F P/E. As of 31 Oct, it has secured contracts amounting to SGD348m – with SGD305m expected to be recognised this year. With that, we expect FY15F earnings to be significantly lower than last year and decrease our FY15F-17F net profit by 7-10% to reflect the new challenges facing the retail interior industry.
■ Gross margin dragged down by new client mix
Kingsmen Creatives’ (Kingsmen) 3Q15 gross margin dropped to 23.4% from 24.7% in 3Q14, dragged down by a lack of high-margin retail interior projects from its luxury retail segment. Stronger contributions from its exhibition and museum (E&M) unit also pulled down the overall gross margin.
■ Growth of new clients hindered by lack of project managers
The company continues to focus on pursuing projects from affordable luxury and fast fashion brands. The food and beverage (F&B) segment is also one of Kingsmen’s targets, as F&B players are the most resilient in their expansion, taking up about 20% of shopping mall space in Singapore. However, we note that these projects are smaller and have lower margins. Thus, it would be unable to make up for the slack from the luxury segment due to its limited project managers.
■ Reasonably strong growth in E&M sector YTD
E&M revenue fell 8% in 3Q15, against our expectation. However, we believe this could be due to the timing of revenue recognition of different projects. The company has since added 30 new staff in its Middle East office. We see this as signs of potential growth coming from that region.
■ Ready to take on new challenges
While the decline in the luxury segment has dampened Kingsmen’s performance this year, we believe the company is now in a better position to handle the slowdown as it seeks out a new client base. We maintain our NEUTRAL call with a TP SGD0.75, pegged to 10x FY16F P/E. (Read Report)
Source : RHB Research