OKP Holdings

UOBKayhian on 23 Mar 2012

Investment Highlights

• OKP is currently trading at 6.8x FY11 earnings, a 22% discount to its peers. Based on Bloomberg’s consensus earnings forecast from five brokers, OKP is set to report flat earnings growth to S$26.5m (mean estimate) in 2012 with a 12-month target price of S$0.82.
• We view that OKP should be trading at S$0.74/per share, pegged to 3-year historical average PE of 8.6x on consensus EPS of 8.6 S cents, giving us an upside of 21%.  

Our View

• We expect construction demand to remain strong for the next three years. According to the Building and Construction Authority (BCA), public sector construction demand is likely to contribute S$13b-15b in 2012, driven by institutional building projects and civil engineering contracts. The Public Utilities Board (PUB) has also announced that they will spend about S$750m over the next five years to carry out 20 projects to improveSingapore’s drainage system.
• OKP’s S$323.9m orderbook to provide earnings sustainability through to 2015, with the most recent Design and Build (D&B) contract win of S$75.3m from the Land and Transport Authority (LTA), for the expansion of the Central Expressway (CTE), Tampines Expressway (TPE) and Seletar Expressway (SLE) Interchange. D&B projects tend to achieve higher gross profit margins due to costs savings, better project management and tighter cost controls.
• With its strong track record, OKP is set to secure more contracts from LTA and PUB. Last year, it had secured a total of seven from these two statutory boards worth S$152.0m, including two D&B and projects from LTA and four projects from PUB. As highlighted above, with PUB’s S$750m earmarked for 20 drainage improvement projects over the next five years, we believe OKP can benefit in future infrastructure project tenders.
• Formidable war chest of S$91m could lead to more property construction project. OKP is currently undertaking a S$83.5m contract in a 50:50 JV with Soilbuild for the construction ofAngullia Park condominium, awarded by its 14.2% substantial shareholder China Sonangol (CS). With CS securing Amber Towers in the Katong area for S$161m, we expect OKP to tender for the construction of this residential project as well. The site can be redeveloped into a high-rise condominium with a gross floor area (GFA) of 145,813 sqf. We estimate that this contract size could range from S$35.0m-43.5m if we take construction cost to be S$250-300 psf.