At the end of October 2018, Cityneon Holdings (Cityneon) – one of Shares Investment’s favourite companies, saw an offer from West Knighton to take the company private. West Knighton, a special purpose vehicle indirectly owned by Cityneon’s chief executive officer Ron Tan and Hong Kong entrepreneur and investor Johnson Ko, launched a privatisation offer for Cityneon at $1.30 per share, valuing the company at about $318 million.
Following the acquisition offer for Cityneon, we look to Kingsmen Creatives which paradoxically fell under investors’ radar. In this article, we compare Kingsmen Creatives against Cityneon to see, relative to the latter, if there are any value propositions to investors.
A More Diversified Portfolio
Kingsmen Creatives (Kingsmen) is Cityneon’s closest peer listed on our local bourse. Like Cityneon, one of Kingsmen’s core segments is organising exhibitions and thematic museums for its clients. Notable projects undertaken this year include F1 Singapore Grand Prix, NDP2018, Shenzhen Binhai Tencent Exhibition Centre and the Singapore Airshow 2018.
Kingsmen’s portfolio is more diversified than that of Cityneon. According to the former’s latest 9M18 financial results, the exhibitions and thematic segment only contributed 43.3 percent to the topline. The other core segment, the retail and corporate interiors division accounted for 49.4 percent of revenue and clients include global brands like Singtel, Nike and Coach.
The remaining 7.3 percent of contributions stem from its Research and Design division and alternative marketing division. Notable clients are also renowned multinational corporations like Tencent, TAG Heur, P&G and Burberry.
In terms of revenue, Kingsmen’s topline dwarfs that of Cityneon. As of 9M18, Kingsmen generatedrevenue of $238.8 million, almost three times the size of Cityneon’s $85.5 million.
However, Cityneon’s topline growth is much faster than Kingsmen. On a cumulative 9M18 basis, Cityneon’s topline jumped 28.7 percent compared to Kingsmen’s 11.6 percent. For 3Q18, the former posted revenue growth of 67.3 percent versus Kingsmen’s 33.1 percent. Figuratively, it could be said that Cityneon is growing two times faster than Kingsmen.
Notwithstanding that, Cityneon is into its fifth consecutive year of topline growth. On the other hand, Kingsmen saw a 6.8 percent contraction in FY17 and also a contraction of 2.5 percent in FY15.
In terms of profitability, Cityneon also trumps Kingsmen in terms of both gross profit and net profit margins. For Cityneon, gross profit margin has been trending higher from 28.3 percent in FY14 to 58.5 percent in 9M18. On the other hand, Kingsmen’s gross profit margin has declined slightly from 25 percent to 22.8 percent over the same period. This suggests a greater level of competition for Kingsmen than Cityneon which is likely due to latter’s strategy of acquiring intellectual property rights.
Net margin wise, Cityneon is at a healthier level than Kingsmen at 16.1 percent in 9M18. Kingsmen on the other hand is at 1.9 percent. In the recent financial years, the highest net margin recorded for Kingsmen was only 5.8 in FY15.
The low net margin for Kingsmen was due to a large employee benefit expense which accounted for 76 percent of gross profit in 9M18, compared to 47.6 percent for similar costs for Cityneon. Nonetheless, it also indicates that Kingsmen has little margin of safety before the company falls into negative earnings growth.
As of the latest 9M18, Kingsmen holds a total debt of $27 million against cash of $61 million in its balance sheet. Meanwhile, Cityneon has a total debt of $131.8 million against cash of just $11.8 million. Correspondingly, this translates to a net cash position of $34 million for Kingsmen and a net debt position of $120 for Cityneon.
On a total debt-to-equity basis, Kingsmen has a total debt-to-equity ratio of 22.6 percent while Cityneon is at 186.3 percent. This puts Kingsmen in a much better financial standing than Cityneon.
According to Kingsmen’s management, as at 31 October 2018, the company has secured contracts worth $403 million, of which $345 million is expected to be recognised for FY18. In other words, we can expect 4Q18 revenue to be around $110 million, bringing Kingsmen to a record topline performance this year. Going forward into FY19, there is the remaining $58 million secured contracts that would support its topline as well.
Notwithstanding that, Kingsmen has partnered US toy giant Hasbro to open NERF Family Entertainment Centres (FEC) in Southeast Asia. The new initiative also gives Kingsmen the exclusive rights to design, construct and run all NERF FECs in the region. In a similar move to Cityneon, Kingsmen’s venture into intellectual property ownership could raise it to a higher value chain and hopefully translate to expansion in its gross margin. The first NERF centre is slated to be opened in Singapore’s Marina Square shopping centre and it would be an interesting development should the concept prove to be a success.
Currently, Kingsmen is trading at $0.505 per share, representing a market capitalisation of $100.8 million and trailing 12-months price-to-earnings of just 9.4 times. The stock also offers a yield of 5 percent based on annual dividends of $0.025 per share over the last 3 years.
On the other hand, Cityneon is valued at more than three times with a market capitalisation of $318 million. The company, at $1.30 per share, is valued at a higher P/E of 11.5 times while offering no dividends to shareholders. This is due to high debt levels and cash generated would first be used to pare down borrowings.
The comparison between the two companies yields a mix picture. While Cityneon is growing at a faster pace and boasts higher profitability, Kingsmen is financially healthier and offers a respectable yield to investors. Kingsmen is also trading at a 16 percent discount to its book value. If the privatisation offer for Cityneon cued an undervaluation for the stock, Kingsmen would appear underappreciated by a larger degree.