Internal controls working, but is this enough? Kingsmen discovered that employees at its Beijing subsidiary had misappropriated funds between 2009 and 2011. It has recovered most of the amount concerned, save for RMB146,835 (SGD29,000). It has also discovered irregularities in a Singapore subsidiary, relating to payment to a project subcontractor. We are of the view that this discovery indicates that the company's internal controls are indeed working.  However,  it  also  inevitably  gives  rise  to  concerns  whether  similar  irregularities may have occurred in other Kingsmen subsidiaries. Management has started to review and strengthen its internal controls in a bid to prevent such incidents from recurring.

Operations  proceeding  smootly;  outlook  still  bright.  In  the  meantime,  management highlighted that it's business as usual, with a full pipeline of projects coming up. Given that the company had a net cash balance of SGD43.7m as at 3Q12, this additional SGD1.5m charge  is  not  likely  to  have  much  impact  on  its  operations.  Thematic  and  scenic construction  activities  are  expected  to  keep  Kingsmen  busy,  as  more  theme  parks  in  the region  are  slated  to  open  over  the  next  few  years.  Management  has  also  said  it  will continue to try and secure more new projects in this space.

Maintain  BUY,  TP  S$0.79.  While  we  do  not  discount  the  possibility  of  Kingsmen uncovering  similar  incidents  at  its  other  subsidiaries,  we  continue  to  like  its  stable  and attractive  dividends.  Management  has  acted swiftly  to put things in check  and strengthen its internal controls. That said, the SGD1.5m charge to its financials prompt us to lower our TP to SGD0.79, based on 6x FY13F earnings (ex-cash).

Source: OSK