OKP Holdings Limited (OKP.SP) is a civil engineering company specializing in road and expressway construction. OKP is involved in two major segments: Construction and Maintenance. The construction segment involves the construction of urban and arterial roads, expressways, vehicular bridges, flyovers, airport runways and taxiways; and civil construction work for petrochemical plants and oil storage terminals. The maintenance segment involves road upgrading works and drainage improvement.
Gross profit margins for the construction and maintenance projects secured for projects in its current order books varies, with construction margins averaging between 15% to 20% and maintenance margins hovering between 12% to 15%. OKP’s current S$346.1 million order book (third quarter 2012) can last till fiscal year 2015.
Is It Cheap?
- Trading at 1.7x P/NTA, a 5% discount to its five-year average P/NTA of 1.8
- Trading at 8.3x P/E, close to five-year historical high P/E of 9.6
- ROE (trailing twelve months) was 21.4% and ROE (five-year average) was 30.5%
- Dividend yield 4.0%
- Book value growth (five years) 11.7%
- One-third of market capitalization of S$151 million backed by strong net cash position of S$49.9 million
Is It Safe?
- Total gross debt to equity ratio was 1.4%, in net cash position
- Revenue volatility
OKP’s revenue can be volatile as revenue recognition is contract-based, which may be lumpy and unpredictable. In economic downturn, infrastructure projects may be shelved or scaled down. OKP may face stiff competition from peers in bidding for tenders and could face price under-cutting pressure from them. OKP might have to bid for contracts at lower margins, thus leading to lower profitability.
- Costs pressure
Third quarter 2012 gross profit margin of 22.6% was significantly lower than third quarter 2011 gross profit margin of 32.4%. Management attributed the fall in margins to lower profit margins for new and on-going projects and cost overrun on some sewer related projects in third quarter 2012.
The tightening of the labor market and the increase in foreign work levies will impact OKP's margins. Eighty percent of OKP's cost are raw materials (steel bars, concrete) and 20% labor costs.
- Minimal capex for construction segment.
Many of OKP’s requirements of machinery and equipment are already met. In addition, OKP has its own in-house equipment service center in Sungei Kadut to service equipment to reduce the cost of maintenance capex.
Although there are minimal capex needs in the construction segment, cash may be expended on property development activities.
- Dilution from warrants
In January 2010, the group issued about 61.8 million warrants (about 25% of existing share cap), exercisable at a strike price of S$0.20 any time before January 2013. The intention was to finance future investments and working capital needs with the proceeds from the exercise of warrants. Of the 61,822,852 warrants issued on Jan. 6, 2010, 505,000 had been exercised by warrant holders at the exercise price of $0.20 per share during fourth quarter 2011. Only 3,869,675 warrants remain outstanding as at Dec. 31, 2011.
Is It Quality?
- Established road infrastructure construction firm
OKP Holdings has an impressive track record of wide ranging infrastructure projects for prominent government bodies and statutory boards such as Land Transport Authority (LTA), Jurong Town Corporation (JTC) and Public Utilities Board (PUB). For the widening of CTE (one of the major expressways in Singapore), OKP was the only contractor that submitted a bid, which it eventually won.
- Special dividends no more?
OKP proposed a 2-cent final dividend to bring fiscal year 2011 payout to 3 cents per share – about one-third of EPS. Last year, OKP had paid out an additional 2-cent special dividend. The absence of this additional dividend in spite of a net cash position suggests that OKP is setting aside cash for potential expansion into property development.
It has a very strong financial position, and valuations and dividend yield are reasonable but unattractive. Also margins vary from project to projects, with raw material costs and labor costs acting as a wildcard.
Disclosure: Not vested.