OKP Holdings (SGX:5CF) – This, Too, Shall Pass

In Singapore’s rather small infrastructure construction landscape, there are few market leaders that are well known throughout the industry. You have KTC for earthworks, CSC/Ryobi Kiso for bored piling, Yongnam for steel construction etc etc. For roadworks, we have Or Kim Peow Contractors (OKP).

OKP Holdings Limited and its subsidiary corporations are a leading infrastructure and civil engineering group in Singapore. They specialise in the construction of infrastructure projects such as airport runways, flyovers, bridges etc etc.

OKP also undertakes maintenance works for roads and road-related facilities as well as building construction-related works. Over the past years, OKP has extended their core business to include property development and investment.

Currently, the company is riding through difficult times. There was a fatal accident which occurred at their work site in 2017 and several individuals as well as their subsidiary, OKP Contractors Pte Ltd, are set for trial soon.

Their share price have plunged more than 50% since the incident and I feel that it is rather undervalued at the moment and if we look beyond this incident, all is not lost and the company still has the potential to grow.

Accident At Uncompleted Viaduct

If you are looking at this company, you would have known about their 2017 fatal accident. One worker died and 10 others were injured after an uncompleted viaduct that was being built along Upper Changi Road East collapsed in the early hours of Friday of Jul 14 2017. My condolences goes out to the deceased’s family.

Earlier this month, the Accredited Checker was sentenced to 6 months jail time. The rest involved in the case are set to claim trial later.

What Happens Next?

What will happen to them after this incident? I would like to assume the worst case scenario for OKP Contactors, which is a maximum fine of $1 mil and 1 year ban from tendering public projects (Disclaimer: I may be wrong). As a civil infrastructure contractor, that practically takes them out of the construction scene as their projects are mostly public projects.

However, it does not mean that OKP Holdings, the parent company, will not be able to replenish their order book. Let me explain why, here’s their group structure.

Group Structure of OKP Holdings Limited

Under OKP Holdings, they still have another A1 contractor (no tendering limits) in Eng Lam Contractors Co. They are still pretty active in public tenders and have won a few large contracts last year.

For OKP Contractors, I’m sure they will be back in the civil infrastructure scene soon enough. Of course, I’m not sure how successful they will be on their tendering (due to their accident record), but looking at the Nicoll Highway collapse incident, the main contractors, Nishimatsu and Lum Chang (joint venture project), are still able to secure government projects till now. Of course, this is only an assumption.

Rock Solid Balance Sheet

As of their financial report as of 31 March 2019, their cash and cash equivalents stands at $71.6 mil. Adding their investment property in Perth, Australia and deducting their debt, these alone are worth about $0.31 per share.

I might also add that is also quite rare for a construction company to have a pretty low debt equity ratio. You can have a look at the financials of other construction companies like Lian Beng, CSC, Koon etc. Also, their debt is to finance the purchase of the investment property and not for their construction & maintenance segment, all the more pointing to a very solid balance sheet.

As of 31 March 2019, their order book stands at $291.6 mil. Assuming a 10% profit margin, that’s about $29 mil PBIT to be earned till 2023.

As for their property development, assuming breakeven cost at $1100 psf the average selling price for the condo (about 18% sold since March 19), ranges between $1300-$1400 psf. With maximum GFA of 64,551 sq ft, their 22.5% stake in this development will rake in a profit of about $3.6mil.

This, Too, Shall Pass

The accident in 2017 has cast a shadow on the company’s outlook but I believe that after the settlement of this issue, time will allow us to look beyond and focus at the potential of this company.

(I would like to add that if people are willing to look beyond the potential fine that awaits Sembcorp Marine and invest in them, why not OKP?)

With a large cash reserve, they have the ability to invest in opportunities be it another development project or investment properties to secure recurrent income. Meanwhile, their expertise in civil infrastructure projects will continue to be their main bread and butter.

Hence, I feel that it is worth to invest in this company at current price levels and I am pretty optimistic that OKP will overcome these challenging times and continue to grow.

The Moss Piglet is vested in OKP at $0.20.

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