Initiating Coverage BUY
Current Price: S$0.575
Fair Value: S$0.65
Established road infrastructure construction firm. OKP Holdings has an impressive track record of wide ranging infrastructure projects for prominent customers, such as Land Transport Authority (LTA), Jurong Town Corporation (JTC) and Public Utilities Board (PUB). To date, they have completed more than S$250m (excluding mega contract for CTE) worth of roads and civil engineering projects for LTA, and continues to win sizable public infrastructure tenders.
Excellent revenue visibility. The company's current order book is c.S$370m, and will stretch till end of 2014. Given OKP's highly selective tendering process and solid execution track record (ZERO delays in its operating history), the projects can reasonably be expected to be profitable and well managed. OKP's market share for public infrastructure projects in recent years has been healthy, and we believe it will continue to remain so. On top of its firm foothold in the public space, OKP believes revenue can be broader based in future, with expansion into property construction, oil and gas and even MRT lines projects possible.
Healthy balance sheet will give strategic flexibility. As of end-2Q11, OKP's cash holdings make up c.57% of its market capitalisation. The company has virtually no debt and operates on a net cash basis. Such a "war chest" will give OKP's management flexibility in pursuing different avenues of growth, such as property construction and even property development, given its partnership with China Sonangol. The effective management of Property, Plant and Equipment (PPE) has also allowed the company to stretch the useful lives of their machineries, thereby reducing unnecessary capex and thus saving cash for OKP.
Strong margins vis-a-vis peers plus undemanding valuations - initiate with BUY. Relative to construction peers, OKP's operating and net margins lie above industry averages. We expect its superior margins to continue, because: 1) recent wins on its order books hold clauses which protect OKP against significantly higher material prices; 2) increased number of Design & Build contracts in the pipeline should yield bigger margins; and 3) the fact that the company has factored in labour costs trends when tendering for projects. Despite its sound performance, the company's forward P/E for 2011 and 2012 lies below industry averages, making valuations undemanding. We assume that OKP will continue to enjoy similar market share of future public infrastructure projects, adding ~S$156m of new contracts each year for both FY12 and FY13. We also forecast EPS of S$0.093 and S$0.095 for FY12 and FY13, respectively. Applying the industry average of 7x forward P/E to FY12 EPS, we derive a fair value of S$0.65, implying 13% upside. Initiate with BUY.
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