OKP Holdings - Margin expansion drives growth (DBSVickers)

BUY S$0.64 STI : 3,186.57

Upgrade from HOLD

Price Target : 12-Month S$ 0.80 (Prev S$ 0.64)

Reason for Report : Better than expected margins

Potential Catalyst: Margin sustainability, M&A and investments

DBSV vs Consensus: Our FY11 EPS estimates are higher on the back of higher margin assumptions

• 2Q11 net profit blows estimates, up 61% y-o-y

• FY11/12F EPS estimates raised by 19-29% on higher gross margin assumptions

• Upgrade to BUY with higher TP of S$0.80; catalysts likely from M&A activities and investment of surplus cash in new or related businesses

Results beat our estimates handsomely. 2Q11 net profit of S$6.9m was surprisingly strong – up 61% y-o-y and 32%q-o-q. This came on the back of slightly lower than expected revenues of S$28.3m (down 29% y-o-y and 14% q-o-q) and was largely driven by expanding margins. OKP recorded gross margin of 39.4% in 2Q11, compared to 26.7% in 1Q11 and 16.5% in 2Q10, as a result of revenue recognition from the higher margin design-and-build projects like the CTE expansion project.

Higher earnings growth trajectory likely. While the quantum of 2Q11 gross margin is one-off in nature and margins will normalise over the year, we still expect them to record better margins in FY11/12 compared to prior years as more design-and-build projects contribute. On the back of higher margin assumptions, we revise up our earlier conservative FY11/12 EPS estimates by 19% and 28.6%, respectively. Our revenue projections are backed by OKP’s S$382m gross outstanding orderbook and OKP has already secured about S$104m of new orders YTD in FY11 (60% of our new order assumptions).

Upgrade to BUY. Given the healthy 15% EPS CAGR over FY10-12, we upgrade the stock to BUY with TP revised up to S$0.80, based on 1) 7x FY11/12 blended PE for its recurring business and ii) estimated S$0.23 per share surplus cash. OKP currently has about S$97m net cash on its books (S$0.32 per share), and dividend yield looks attractive at about 7.7%. Interim dividend of 1Sct (in line with FY10) has already been declared. Re-rating catalysts could come from deployment of surplus cash towards M&A activities to drive vertical integration, or even towards investments in property developments.