OKA Corporation Bhd (7140)   Posting Concrete Results

Last: RM0.92

Summary

• Beneficiary of infrastructure needs in Malaysia and Singapore.
• ROE to increase with strong earnings.
• Current price indicates undemanding valuations at 4.9x FYMar2014 P/E
• Blue sky valuation indicates potential upside target of RM1.87 based on 10x FYMar2014 P/E (by applying 40% discount to KL Construction Index P/E of 16.7x)

Business Overview

Good Exposure to Precast Concrete Manufacturing

OKA is engaged in the production and wholesale distribution of precast concrete products and ready mixed concrete. The precast concrete products manufactured by the group are used in the drainage, sewarage, buildings and water related infrastructure works.

It started operation in 1981 via its OKA Concrete Industries Sdn Bhd and is now one of the largest manufacturers of precast concrete products in Malaysia. The long established track record forms one of the barriers to entry for new entrants. 

Management led by Ong Kok Ann family

Founder Ir. Ong Kok Ann and his wife Mdm. Quah Seok Keng collectively own 55.8% of OKA.

Well Spread Plant Locations to Tap Demand

The head office of the OKA Group remains in Ipoh (Perak) and the factory operations are located at Batu Gajah, (Perak), Senai (Johor),Nilai (Negeri Sembilan), Gambang (Pahang), Sungai Petani (Kedah).

OKA had been awarded the Singapore Product Standards Board certification for reinforced concrete pipes in FY2012 and now contributes positively to its financial results.

Latest Financial Results

OKA's 6M FYMar2014 net profit rose 86% yoy to RM5.61m boosting half year EPS to 9.35sen.

On the back of relatively unchanged revenue base (6M FYMar2014: RM71.17m vs RM70.93m in last corresponding period), its profit margin was lifted by sales of products with higher margin during recent 6M period.

Its balance sheet is healthy with 12% net debt.

Precast Concrete Industry

Evolve into Industrialised Building System (“IBS”)

The trend of the Malaysian construction industry has moved from the traditional method to Industrialised Building System (“IBS”) manufacturing. IBS is a technique of construction whereby components are manufactured in a controlled environment, either at site or off site, and transported, positioned and assembled into construction works.

IBS boosts Precast Demand

The most popular IBS component used in Malaysia is precast components. First, it was announced that all new government building projects are required to have at least 50% IBS content commencing 2005. It has now risen towards 70% IBS content for public sector building projects. Also, the government via Construction Industry Development Board Malaysia (“CIDB”) hopes to increase the existing IBS content to 50% for private sector building projects by 2015. Housing developers who utilise IBS components exceeding 50% will be given full exemption on levy imposed by CIDB.

Valuation of Precast Concrete Companies

Earning Multiples compared to Pretax Margin

While construction companies command P/E ranging from around 10x (mid cap) to 15x (big cap), they enjoy only 7% to 9% pretax profit margin.

Meanwhile, cement related companies have mid-teen% pretax profit margin and therefore command higher P/E of around 20x

However, precast concrete companies which actually fetch mid-teen to twenty plus % pretax profit margin are accorded only around 10x P/E by most research houses at the moment.

Peer Comparisons

Given the lack of pure precast concrete companies in town, the following table tries to tabulate valuation of companies with precast concrete arm:-

*P/E based on last 12 months EPS

Note: 

1. MTD ACPI’s FYMar2013 posted 15.9sen EPS but mainly due to exceptional write back of Liquidated Ascertained Damages (“LAD”) incurred previously.
2. KimLun’s precast concrete manufacturing division contributed 10% of the group’s total revenue and 25% of gross profit in FYDec2012.
3. IJM’s Industrial Concrete Products Bhd (“ICP”) is engaged in the manufacturing and sale of Pre-tensioned Spun Concrete (“PSC”) piles, building materials, plant and machinery, quarrying, ready mixed concrete, pc bar, scaffolding renting and investment holding. ICP was taken private and delisted by IJM in Dec 2008 at RM3.30 per share via 0.6 IJM share plus RM0.26 in cash. It was then valued at 2.2x P/B and 13.9x P/E based on FYMar2008 results.

OKA is deeply undervalued 

Based on OKA’s last share price of RM0.92 vs its NTA of RM1.72 per share, it is now trading at sharp discount of 0.54x P/B.

Also, after 2 impressive quarterly results and if OKA continues the stellar performance for the rest of FYMar2014, its annualisied  EPS  will be  at an impressive 18.7sen.  That means it is currently trading at only 4.9x P/E even after yesterday's sharp rally. 

Pegging the stock at 40% discount to KL Construction Index of 16.7x derives 10x FYMar2014 P/E. This provides potential 103% upside towards RM1.87 for OKA.

P/E of OKA compared to KL Construction Index

P/B of OKA compared to KL Construction Index 

Historical Share Price of OKA