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.

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.

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.

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.

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.

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.

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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