OKP Holdings

OCBC on 9 May 2012

OKP Holdings (OKP) reported that its 1Q12 revenue declined 24% YoY to S$25.0m and PATMI plunged 42% YoY to S$3.1m. In addition, OKP’s 1Q12 gross margin contracted by 5.7ppt to 21%. OKP’s 1Q12 revenue and PATMI have respectively only met 17% and 12% of consensus full-year estimates. But management believes outlook for the construction sector will remain healthy over the next twelve months but warned that OKP’s profit margins are likely to remain under pressure. With a lack of clarity in OKP’s ramping up of revenue recognition of projects and management’s warning on possible margin pressure, we reduce our FY12F revenue and PATMI estimates of OKP by 39% and 35% respectively. Consequently, we lower our fair value estimate of OKP from S$0.75/share to S$0.53/share and downgrade its rating to HOLD.

1Q12 PATMI plunged 42% YoY
OKP Holdings (OKP) last night reported that its 1Q12 revenue declined 24% YoY to S$25.0m and PATMI plunged 42% YoY to S$3.1m. Management said construction revenue fell 26% YoY to S$20.7m because there was lower revenue recognition from a few newly-awarded construction projects. Furthermore, maintenance revenue slid 13% YoY to S$4.3m also due to slower revenue recognition, caused by a number of maintenance projects which were reaching completion and the lack of new business wins during 1Q12. In addition, OKP’s 1Q12 gross margin contracted by 5.7ppt to 21% because a more profitable project, which has since been completed, boosted its gross margin back in 1Q11.

Management remains optimistic
Management believes outlook for the construction sector will remain healthy over the next twelve months. However, management also highlighted that competition is likely to intensify and pricing is likely to turn aggressive, resulting in downward pressure on OKP’s profit margins.

Lowering our full-year estimates
OKP’s 1Q12 revenue and PATMI have respectively only met 17% and 12% of consensus full-year estimates, which by any account, is a disappointing set of results. Despite OKP’s winning a S$75.3m design-and-build project to expand the CTE/TPE/SLE interchanges from the Land Transport Authority, there is a lack of clarity in OKP’s ramping up of revenue recognition of projects. Coupled with management’s warning on possible margin pressure, we reduce our FY12F revenue and PATMI estimates of OKP by 39% and 35% respectively to S$120.5m and S$19.8m.

Downgrade to HOLD with new fair value of S$0.53
We reduce our fair value estimate of OKP from S$0.75/share to S$0.53/share, by pegging our new EPS estimate to the same P/E multiple of 7.5x, and downgrade its rating to HOLD.