OKP Holdings: King of the road (DMG)

(Initiating Coverage – BUY, S$0.555, TP S$0.80)

OKP Holdings (OKP), the only listed road specialist in Singapore, is set to ride on the nation’s building boom, benefiting from major public works like the S$6-7b North-South Expressway. OKP’s strategic tie up with China Sonangol (CS), which owns 14.2% of OKP, is a gateway to more potential projects. OKP has already secured the building project of luxury condominium Angullia Park from CS, the developer. With a cash hoard of S$98.6m (net cash of 31.9S¢ per share) and a financially strong partner like CS, OKP’s already strong construction earnings may be given an added boost with property. With a record gross order book of S$433.3m, FY11 looks set to be a banner year, with earnings likely to leap over 25% YoY. At current price, OKP trades at 8x prospective P/E, which is a justified premium to peers at ~6.5x, due to its leading position as a road specialist and its heafty cash position. Net of cash, OKP’s FY11 and FY12 P/E falls to 3.4x and 3.1x respectively. Initiate with BUY and TP of S$0.80, based on a target P/E of 6.2x (net cash).

A leading road specialist; strong gross order book of S$433.3m. As at end Aug, OKP has a healthy order book of S$433.3m (+39.8% since Feb 11), spread across 13 projects. The contracts will run till FY14, lending some visibility to its earnings. Solid earnings over the years have allowed the contractor to build up on its cash hoard. With spare capacity to take on sizable projects and strong financial position, OKP is in the right position to ride on the road in Singapore.

Potential earnings booster from property development. CS has acquired Amber Towers and we think OKP could be slated either to jointly develop the property together, and/or go in as a contractor. We have not factored any earnings from its role as a potential developer.

Valued at a justifiable premium to peers. On the back of strong construction demand, we estimate earnings to hit S$21.3m in FY11. Based on net cash target P/E of 6.2x FY12 earnings, we derive a TP of S$0.80 (upside of 44.1%).