Kori Holdings

UOBKayhian on 22 Aug 2013

Valuation/Recommendation

• Maintain BUY but with a lower target price of S$0.525, based on 4.9x 2014F PE. We have lowered our 2014F EPS due to the dilutive effects of the convertible shares. We believe the stock may see downside pressure in the near term, as dilutive effects of the convertible bond reduce Kori’s attractiveness to its peers. However we remain upbeat on Kori in the longer term as its growth story remains intact. 

Investment Highlights

• Proposed issuance of S$5m convertible bond to Keong Hong, at an interest rate of 5% p.a.. The bond may be converted at a conversion price of S$0.42/share, anytime till the maturity date in 2016. The convertible shares will represent 10.71% of Kori’s enlarged share capital. Proceeds from the convertible bond will be used for M&As, which is in line with Kori’s plans to enter the private sector and increase its capacity to meet rising demand. 
• Significant war chest. With the proceeds from the convertible bond, Kori will have a cash war chest of S$14.3m. 

Our View

• Expansion plans reinforces Kori’s growth story. While the dilutive effects of the convertible bond have reduced Kori’s attractiveness to its peers (Kori’s 2013F PE of 6.8x based on diluted earnings vs its peers’ average of 7.9x), it reinforces the company’s growth story as management raises funds to expand operations. Earlier in July, Kori had announced the acquisition of a new storage yard in Malaysia, as it tries to free up more labour in Singapore to meet rising demand. 
• Synergies with Keong Hong. Keong Hong (KH) is a main contractor whose clientele are in the private sector and include major developers like Keppel Land. With plans to enter the private sector, we believe Kori will be able to tap on KH’s extensive network and grow its business. As an auxillary service provider to main contractors, there are also direct synergies between KH and Kori (eg structural steelworks for underground carparks). 
•  Growth story still intact. Kori’s compatible structural steel and tunneling business segments continue to position it as an ideal partner for main contractors of the Thomson Line. Net profit for Kori had grown at an impressive 3-year CAGR of 29.6% from 2009 to 2012. Underpinned by the robust local construction demand and expansion plans into the private sector, we forecast a 3-year CAGR of 16.7% in net profit to S$12.5m in 2015.