OKP Holdings Limited - Near-term prospects to remain healthy (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.525

Fair Value: S$0.640

Pressing ahead with work on new tenders. We recently caught up with OKP's management for an update of their outlook of 2012 and also as a check of our contract win assumptions for the next two years. From speaking with them, we understand that the group has been working on a number of tenders. Given its high tender success rate (c.94% success rate for tenders the group participated in during 2010) and track record, we believe that the group will be successful in some of its tenders, and add more contracts in the near future. OKP's current order book already offers revenue visibility till 2014. More contract wins will provide more assurance to our view that OKP's project pipeline will continue to grow.

Exposure to government spending. Majority of OKP's projects are government-related and LTA is a major customer. As it stands, the government has already shown commitment to several projects to expand the island's road network. An example is the acquisition of the Rochor site, making way for the construction of the 21km North South Expressway. Besides the projects already in the pipeline, we believe there may be more to come. Based on recent history, the government typically increased its construction spending during periods of low economic growth. Following recent downward revision of Singapore's GDP growth forecast, we believe there is an increased likelihood that the government will look to increase its spending. This will be positive for OKP's near-term prospects.

China Sonangol partnership may bear fruit soon. OKP's partnership with China Sonangol (CS) has already resulted in the group gaining a construction contract for Angullia Park. As CS moves towards completion of the acquisition of Amber Towers, we believe this may present another possible area of collaboration between them. Given OKP's strong balance sheet (net cash of c.S$94.7m as of 3QFY11) and its intent to diversify into property development (resolution passed after Sep. 2010's EGM), we see possibility of OKP participating in the Amber Towers project, alongside CS. In addition, we also believe OKP stands to win more residential construction contracts through this, given that their current working relationship.

Maintain BUY. Given OKP's order book of more than S$400m and its gainful position if Singapore government increases infrastructure spending, we continue to believe that the nearterm prospects of OKP should remain healthy. We also like OKP's above peers' margins and undemanding valuations. We re-iterate our BUY rating and maintain our fair value estimate at S$0.64, implying potential upside of c.22%.