I saw this company on Newspaper when I went back to Singapore for CNY, and at that time the share was trading at around 33 cents.. I decided to wait for few months to see company's performance before I park my cash into this counter. Well, seems like I missed a steady 30% gain as at the time of writing the share closed at 42.5 cents. So now I will look closer to this share to see whether I should continue store it in my WL and wait for next opportunity first, or the share is still undervalue at the current price.
As shown on the chart above, OKP was on a super long term downtrend since 2012! The share price gradually decline from neat 60 cents to 18 cents in less than 4 years. After that, the share price u turned and form a very good V-shape on the chart. Is the current outlook strong enough to support the uptrend of the share price?
Company Summary
The company was listed on SGX since 2002. OKPH is the holdinng company of Or Kim Peow Contractors Pte Ltd which was founded in 1966, Eng Lam contractors Pte Ltd which was founded in 1983, and OKP Technical Management Pte Ltd which was founded in 2002. I like company with long history as I believe reputation of the company takes very long time to build up. As mentioned in their 2016 annual report, OKP’s reputation has grown due to its many
key advantages, which have reinforced its leadership position in
the construction industry, these advantages include our strong
track record, capable management team, experienced and
skilled staff in civil engineering projects, and vast expertise. Currently most of the board directors were appointed since 2002, which was the year OKPH incorporated, which most of the directors are related to the chairman Mr Or Kim Peow, so its more like a family business?
The company has two core business segments: construction and maintenance. The company is also broadening their presence in the oil and gas sector and also property developments and other investments, however the company only holds 10% of stake in CS Amber Development Pte Ltd and Lakelife Pte Ltd, which are the two condo building companies.
As a 'family business', Mr Or Kim Peow and his family owns more than 46% of the total shares of the company. There is another substantial shareholder - CS International (S) Pte. Ltd with 13.98% of the total shares. I found something quite interesting with the top 20 largest shareholders statistics while i am reading the report:
The total percentage of top 20 largest shareholders from 2011 to 2016 actually formed a V shape, which demonstrates a similar pattern with the share price chart. The above chart formed a bottom at 2013, and the share price formed a V-shape bottom at 2015. So is the share price going to follow this pattern and continue its uptrend?
Result Review
The primary business activity of OKP is construction and maintenance. From the track record, the company is able to generate certain about of profit with its contracts. I understand that there are some companies won many contracts but at the end of the day they are unable to generate any profit so end up those companies still have bad results even their order books are huge. In recent years the company's gross profit margin is improving. However, like what Mr Or Toh Wat said in 2015 annual report, OKP is operating in a very competitive business environment. Maintaining good profit margin is extremely challenging as OKP will always face industry wide challenges such as rising of manpower costs, labour constraints and competitive pricing. I am not really sure how does bidding system work in Singapore, but I guess the proposed cost is one of the important factor when government gives projects to companies. I am not expecting that the company can maintain or even increase its gross profit margin. However, the company still can increase their gross profit by winning more orders. A chart of recent years gross profit and net profit is attached:
Interesting thing is, after the total percentage of top 20 shareholders formed a bottom in 2013, gross profit and net profit follows the similar pattern and formed a bottomed in 2014, then share price formed its bottomed at 2015.. So if the top 20 shareholders continue to buy more shares and gross profit and net profit continue goes up, we should expect the share price to go up further more?
As stated in 2016 annual report, the company received three safety awards: One is from Changi Airport Group in recognition of our commitment to achieve Zero Safety Infringement for works at Seletar Airport; and two from the Land Transport Authority (LTA). One is for “Category 2 (Civil contracts not exceeding $120 million) for companies that have achieved above 400,000 accident-free man-hours worked” for Contract ER458, and the other is for the “Major Category (Civil contracts between $20 million and $50 million)” for Contract ER458. I strongly believe that "safety" is one of the key element for a construction company to grow steadily.
However, p/e valuation method is not working very well for OKP. I have calculated the p/e from 2011 to 2016 and created a table as below, take note that the total number of shares increased in 2011 and 2012 and I didn't adjust the EPS as the difference is not significant, and also the EPS used in the table are based on the total number of ordinary shares (diluted EPS):
FY2011
|
FY2012
|
FY2013
|
FY2014
|
FY2015
|
FY2016
|
|
EPS (cents)
|
8.90
|
4.0
|
1.60
|
0.80
|
2.30
|
4.70
|
SharePrice at year end (cents)
|
53.00
|
51.00
|
34.50
|
25.50
|
22.00
|
29.00
|
P/E
|
5.96
|
12.75
|
21.56
|
31.88
|
9.57
|
6.17
|
When the share price was 53 cents, the p/e was only 5.96! Which sounds like a great deal. However the EPS dropped more than 50% in 2012, and EPS in 2013 was only 18% of EPS in 2011. In fact the revenue recorded in 2011 and 2013 is about the same, but gross profit margin was only 10.4% in 2013 and it was 39.3% in 2011. I am not an expert in construction field, and I have no idea how to predict the gross profit margin for the projects won by OKP. So we must monitor the gross profit margin for every quarter very carefully.
OKP released the first quarter result of FY2017 in May. The result is quite impressive. Gross profit margin increased from 12.1% for 1Q16 to 20% for 1Q17, which is also slightly higher than FY2016 average gross profit. The company also receive a higher share of profit of joint ventures as the company recognised a 1.6 million profit from LakeLife Pte. Ltd.. I am also looking forward to the profit recognition of Amber Skye, although the company only owns 10% of CS Amber Development Pte. Ltd.. According to the 1Q17 report, Amber Skye obtained TOP on 27 April 2017, and efforts in marketing the remaining units will continue. I tried to Google this condo, and Zaobao.com stated that Amber Skye only only 5 units last year, but it sold about 20 units in May (this article is posted on zaobao.com on 3 June 2017). So we should be able to see another good profit recognition of joint ventures in 2Q17.
Financial Position Review
As stated in 1Q17 report, the cash and cash equivalent stood at 88 millions, which is equivalent to 28.5 cents of cash per share. Mr Or Toh Wat said in 2015 Annual Report: "Because of such investments, our management has
decided that it would be wise to conserve our cash in order
that we will have the funds and flexibility to consider new
investments if attractive and suitable opportunities arise for
us to venture into. In fact, the stable cash actually supports
OKP in bidding for more and larger projects. This is a more
prudent approach, which will help OKP to manage and
grow a sustainable business in the long run." As the cash position is increasing over the years since 2014, I hope the management is able to use these cash to invest and secure more contracts to improve its financial performance. The company's cash is even more than the sum of company's current liability and non-current liability! The balance sheet is very healthy and the company didn't have bank borrowings.
Conclusion
I just vested OKP @43 cents for 16 lots. The share is current trading at 1.13 times of net tangible assets per share. The balance sheet and contract order book is very healthy, and the company also demonstrate the ability of securing contracts and they even won two contracts from JTC in June! I am looking forward for company to secure major contracts and boost its revenue and net profits! Take note that the share price has increased about 50% since 1 Jan 2017 to the time of writing, so the margin of safety is not very significant anymore. DYODD!
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