OKA, one of the largest precast concrete manufacturer in Malaysia, is an attractive value investment and a small-cap proxy to construction play due to:
(a) sustainable demand for its manufacturer goods with decent sales and profit margin growth opportunity ahead
(b) solid sales and profit growth track record in the past 5 FY
(c) good fundamental with net cash position
I project sales and net profit to grow 12% and 28%-12% in FY15-FY16 period and give a target price of RM1.13 based on 9.0x FY16F P/E, a 33% upside (based on 14-Jan closed at RM0.85).
B) Business Background
Established since 1981 and listed in 2002, OKA core business is in manufacturing and sales of pre-cast concrete products and its products are mainly used in the drainage, sewerage, buildings and water related infrastructure works. Pre-cast concrete products are part of Industrial Building System (IBS), which is a construction technique where construction components (i.e. pre-cast concrete) are manufactured or cast in factory (instead of in construction site). The components are then transported to site for installation. This technique is gaining popularity due to its benefits in reducing reliance on site manpower (thus, foreign workers), save time and operating cost especially for large-size projects and suitable for construction in city center where casting concrete on-site is challenging.
Though pre-cast concrete products can be used in a wide range of construction situation, OKA's products is specialized in drainage and other water related infra works. So OKA is stand to benefit from construction of highway, new township and rail/MRT projects.
Projects that have used OKA products as below:
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| Source: Company website |
OKA's head office is in Ipoh and have factories in Perak, N.Sembilan, Pahang, Johor and Kedah.
C) Industry Outlook
Construction sector will stay busy for at least the next 2 years as existing projects with long-gestation period like West Coast Expressway, MRT and other highways projects will help OKA's manufacturing capacity being taken up. Any new construction works start like LRT3, MRT2 and new highways in Klang Valley will provide better long-term earning visibility to OKA's financial.
D) Financial Analysis
i. Past result analysis
OKA's sales growth is rather mature. With constant single-digit annual sales growth in the past 4 years, it is a slow but steady growing company. In FY2014, PAT, however, grow 136% to RM13.4M from RM5.7M mainly due to higher sales of special products and lower operating expenses. Hence, it registered a significant jump in Gross Profit Margin (18% from 12%) and PAT margin (9% from 4%).
.PNG)
Management Opinion on FY2015 (Source: FY2014 Annual Report)
Challenges:
- uncertainties in raw material pricing & effect of GST
Strategies:
- emphasis on productivity, efficiency & cost saving
- increasing production capacity to diversify products
- continuous development of new & innovative products
- plan for improving use of factory floor space to increase
View on FYE2015:
- fairly optimistic that the Group will continue to grow for FYE2015
FY2013 up to 2QFY2015 (Past 2 and half year)
ii) Latest Financial Review (2QFY2015)
iii) Past 8 Quarter Performance
Gradual rise of sales in the past 8 quarters.
Profit margin rising gradually with the latest 2QFY2015 being the best quarter in term of PAT margin. This should be contributed by the Group continuous effort in improving productivity and efficiency.
Gradual rise of sales in the past 8 quarters.
E) Projection and Valuation
i) Financial Projection
Future growth is expected to be driven by moderate sales growth and operating efficiency improvement.
RHB Research has on 27 Nov 2014 published a research report. My financial projection vs RHB's as below:
ii) Valuation
Share Issued: 152.282m
EPS for FYE on 31 Mar 2016 : 12.6 cent
I give OKA a target P/E of 9x FY2016F which translated to target price of RM1.13 based on:
a) Demand for OKA's products is very stable with moderate growth opportunity in the coming years
b) Good earning visibility due to robust construction sector
c) Healthy fundamental with proven track record of performance
iii) Risk
a) Government's spending cut on infrastructure work
iv) Re-rating catalyst
a) Awards and start of any mega-infrastructure project like MRT2, HSR and new highways projects should cause positive sentiment on construction stock and cause better forward earning visibility and valuation.
b) Better than expected operating effeciency improvement. FY16F EBITM at 15% while latest 2QFY15A's EBITM at 17%.OKA share price is in Short and medium term uptrend crossing above 20 & 50 MA lines. Long-term uptrend will be confirmed (a)if price do not retrace below 200MA and make a new high, and further confirmed if (b) 20MA cross above 50MA. Near-term support at RM0.90 and all-time high at RM1.04 (after price adjustment). Uptrend momentum is highest in 6 months time based on MACD and RSI reading. Price should retrace to 200MA and trendline support before continue its uptrend movement after being oversold in a 1 month rally starting on mid-Dec 2014.
Although OKA's is fundamentally stable, but due to its SmallCap natural, price retrace 50% from the recent selldown from RM1.04 high to RM0.52 without any changes in fundamental. It shows that market risk still play a big role here, traders/investor should form their entry/exit strategy in any investment. Warrant Buffet-like hold-forever strategy may not be suitable to everyone.
Disclaimer: This research is for informative purpose, not a buy or sell recommendation. I do not take any responsibilities on investment actions caused directly or indirectly by this articles. Readers are advised to do their own due diligent as information provided may subjects to errors.
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