OKP Holdings Ltd - CIMB Research 2017-03-15: Road warrior

OKP Holdings Ltd - CIMB Research 2017-03-15: Road warrior OKP HOLDINGS LIMITED 5CF.SI

OKP Holdings Ltd - Road warrior

  • Leading civil engineering specialist with strong customer base and reliable track record of profitability.
  • S$330m order book (as of end FY16) with pipeline till FY19.
  • Potential pick-up in construction activity from private and public sectors.
  • 60% of market cap backed by net cash, with 5.0% historical dividend yield.
  • Currently trades at 8.6x (ex-cash 3.6x) historical P/E, below peers’ average of 11.3x.

The local guy behind Singapore’s extensive infrastructure 

  • We visited OKP management last week, a civil engineering specialist with 50 years’ track record and well-established customer base comprising of the Public Utilities Board (PUB), Land Transport Authority (LTA), Jurong Town Corporation (JTC), Changi Airport Group and ExxonMobil. 
  • Notable projects that yielded better gross margins (vs OKP’s norm of 12-15%) include infrastructure works for airport and maintenance projects for roadside drains.

Consistency is the key to success, according to management 

  • OKP has had topline of over S$100m since FY07, as well as a track record of profitability since listing in 2002. 
  • As at end FY16, it has an order book of S$330m which offers revenue visibility to FY19, according to management, as new projects generally take three years for completion. 
  • We saw an uptick in FY16’s gross margin to 19.7% (FY15: 13.3%), attributed to more efficient cost management and projects of higher complexity. ~70% of its existing order book relates to such design and build projects.

JV/associates’ contribution is a swing factor 

  • FY16 net profit more than doubled to S$14.3m from FY15’s S$7m, boosted by S$3m contribution from a joint venture. This was largely due to the sale of units of the Jurong Lakelife EC development, of which about 45% remains to be recognised upon handover.
  • Management believes stronger traction in the sale of its other property development (10% stake), Amber Skye, could result in greater associates’ earnings contribution.

Higher construction demand in Singapore 

  • According to the Building and Construction Authority (BCA) of Singapore, the total value of construction contracts to be awarded in 2017F is estimated to be S$28bn-35bn (vs 2016’s total construction demand of S$26bn), of which c.70% of the construction demand will be accounted for by the public sector. 
  • The recent easing of property cooling measures could boost private sector sentiment and encourage developers to add on more land sites, based on a recent report by our Singapore property research team.

Net cash, positive operating cashflow and 5.0% dividend yield 

  • OKP’s management says it is committed to rewarding shareholders with consistent dividend payout. The company declared FY16 DPS of 2 Scts, translating into 5.0% dividend yield and 43% payout ratio. 
  • The company currently has a net cash/share of S$0.23 and recorded operating cashflow of S$28.1m in FY16 (FY15: S$20.1m) with minimal capex needs.

Challenges and opportunities 

  • Apart from increasing competition in the industry that may erode margins, management cited rising labour expenses (current workforce of 800 workers) as a constant challenge for the industry, which they can mitigate by passing on the cost inflation to their customers. 
  • With net cash of S$72m as at end-FY16, OKP is looking out for better yielding investments and development projects.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-03-15
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