OKA Corp’s (OKA) 1HFY16 net profit was above our expectations, accounting 64.2% of our full-year estimates. Maintain BUY with a higher MYR1.07 TP (from MYR0.98, 11% upside) based on an unchanged 10x FY16F P/E. We revise our earnings forecasts upwards by 9.0%-10.1% for FY16F-18F by mainly adjusting our cost inputs assumptions to reflect its leaner production. A 1.5 sen interim dividend has been proposed for FY16.

Above expectations. OKA Corp’s (OKA) 1HFY16 (Mar) net profit was above our expectations, accounting for 64.2% of our full-year estimates. Net profit increased by 20.6% YoY to MYR9.8m despite a lower revenue of MYR74.5m (-7.9% YoY) on the back of more higher-margin products sold and lower operating expenses in 1HFY16. As a result, its net profit margin improved to 13.1% in 1HFY16 (1HFY15: 10.0%).

Outlook. We expect the demand for OKA’s products to remain cautiously stable, underpinned by various infrastructure projects that were announced under Malaysia’s Budget 2016, such as new highways and flood mitigation projects. In addition, we believe that OKA’s various cost optimisation strategies is likely to support its margins going forward.

Forecasts. We increase our earnings forecasts by 9.0%-10.1% for FY16F-18F to MYR16.6m-19.1m by mainly adjusting our cost inputs assumptions to reflect its leaner production. Key risks to our forecasts include: i) lower-than-expected demand for its products, ii) lower-than-expected sales volume of higher-margin products, and iii) unfavourable raw material price movements.

Proposed 1.5 sen interim dividend. OKA has proposed a single-tier interim dividend of 1.5 sen for FY16. This represents an interim dividend yield of 1.6%.

Maintain BUY, with a revised MYR1.07 TP. We maintain our BUY recommendation with a higher TP of MYR1.07, following our earnings revisions. Our new TP is based on an unchanged 10x P/E to a higher FY16F EPS. This is in line with the lower end of our 1-year forward target P/E of 10-14x for small and mid-cap construction stocks.

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OKA Corp is involved in the manufacturing of precast concrete products in Malaysia.

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Source: RHB Research - 24 Nov 2015