Fund manager Adrian Day reviews a handful of non-resource companies and provides updates on a number of gold companies in his portfolio.
Kingsmen Creatives Ltd. (KMEN:SI, 0.555), designer and manufacturer of high-end retail stores and more, is one of those companies whose very business is under threat by the internet. Kingsmen, however, has armor, a shield and a sword to defend against and attack the threat.
- Kingsmen recognizes the threat (always a good start) and is developing strategies to enable the business to grow in the new environment; it talks of its "transformation journey."
- It has kept its fixed costs low, enabling it to be nimble in response.
- The balance sheet is strong, and the stock inexpensive.
In all its major divisions, Kingsmen is undertaking exciting and creative initiatives. In retail, it emphasizes the high end, which has been less vulnerable to internet competition. It has moved into the fast-growing co-working spaces business, fertile ground for creative design. As a result, this division saw a 20% increase in revenues last year.
It is also building business in experiential services, and is a "creator of experiences" often in partnership with well-known brands, such as the NERF family entertainment centers across Asia, in partnership with Hasbro, the first of which is expected to open in Singapore (in Marina Square) by the end of this year.
A new agreement was just signed with Discovery Inc. for the development of Animal Planet travelling experiences. Kingsmen will conceptualize, create, build and operate the attraction, with the first also expected to open in Singapore at the end of this year. It is also intended that this will be the start of a partnership between the two companies.
Last year, the company moved into its new headquarters, which includes the "Kingsmen Academy" for training and developing a talent pool. It also opened two new offices, in cities as disparate as Phnom Penh, Cambodia, and Los Angeles, bringing the total number of cities around the world with a Kingsmen presence to 21. The new HQ building and various initiatives incurred significant start-up costs which saw a 16% drop in new profit last year, despite an increase in revenues of 17%. These increased costs are largely temporary.
The long-term slide in the stock price—from a high just over S$1 in 2015—is attributable primarily to the decline in net profit margins, largely from the lackluster retail division, still its largest unit. But these new initiatives come with higher margins and the company aims to more than double its overall net profit margin up from the lows of 2.3% last year to 5% to 6%.
With a strong balance sheet and a p/e of 13x, plus a dividend yield of 4.5%, Kingsmen is attractive and we are confident the increased revenues from recent initiatives will translate into higher earnings in the year or two ahead. Kingsmen is a long-term buy.
Turnaround at Nestle?
Nestle SA (NESN:VX; NSRGY:OTC, Switzerland, 97.19) has reversed eight years of declining growth rates, with the first-quarter growth of 3.4% exceeding 2018's improved growth. The number was driven by 6.3% growth in emerging markets, where there is potential for long-term growth in packaged goods, and where Nestle is generally well established as a brand.
Developed markets—with first-quarter growth of 1.2%--apart from being a more mature market, is also seeing increased competition from niche players, including more healthful snacks. Nestle is looking to growth by acquiring fast-growing smaller companies, as well as looking to make acquisitions in two faster-growing segments, baby food and the larger pet foods. In the former, Nestle is the global leader, though it lags in the U.S. and China; in the latter, it is also a leader in the high-margin business.
Nestle has a strong balance sheet, with high margins and returns. However, at nearly 29 times earnings, it is trading close to its high multiple, while its current yield of 2.5% is the low going back to 2008. We are holding Nestle as a core position, but not buying at current levels.
Dividend up again
Ares Capital Corp. (ARCC:NASDAQ, 17.74, 9%) reported another quarter of strong earnings as it increases exposure to larger second-lien (and higher-yielding) loans. Ares remains the top BDC for risk/reward, particularly given that, at $7.5 billion market cap, it is also the most liquid. Once again, net operating income exceeded the dividend, which was increased a penny to 40 cents per quarter. In addition, Ares has spillover income of about 38 cents a share—equal to virtually a whole quarter's dividend—and has picked up the frequency of its modest special cash distributions.
Trading just a tad north of book value, with a better-than 9% yield, Ares still has not fully overcome the drag from the American Capital acquisition, even though income exceeds the dividend and has for several quarters. Ares remains a strong hold, and a buy for long-term investors on any weakness.
Look out below
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX, US$81.30) and Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$20.86)) both hold streams on the major Peñasquito mine in Mexico, where Newmont Goldcorp Corp. (NEM:NYSE, 30.22) ) suspended operations in response to a blockade by a contractor and others. This is one of the largest gold mines in Mexico, and the second largest silver producer. Just 24 hours after suspending operations, Newmont, in an unusual move, announced it was immediately suspending all payments to workers and—very unusually— stopping social programs including payments to elementary schools. (How to win friends and influence people?) It appears the company is settling in for the long haul. Royal has already had its quarterly report, and the stock fell sharply in response. Wheaton has yet to make any comment on the suspension of one of its largest revenue earners, so the stock could fall when earnings are released this week.
Separately, Royal said long-time president and CEO Tony Jensen plans to retire by the end of the first quarter next year. Mr. Jensen has done a stellar job building the company, and has always been accessible and open in communications.
More cash in the door
Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX, US$0.58) announced it had received from Minera Alamos the second $1.5 million option payment for its Guadalupe de los Reyes project. Two more similar option payments are to be made, one six months from now and the last two and a half years from now. It is a relief that the payment was made, given that Alamos earlier asked for (and obtained) a six-month extension to the payment. This payment strengthens Vista balance sheet, giving it more time to advance its Mount Todd project without dilution.
BEST BUYS NOW Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, US$70.68)—good opportunity to acquire this core holding if you do not own; Lara Exploration Ltd. (LRA:TSX.V, 0.52); Evrim Resources Corp. (EVM:TSX.V, 0.30)); Almadex Minerals Ltd. (DEX:TSX.V, 0.28); and Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, US$3.01).
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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