Category: OKP

On 31st August 2012, Friday, there was a Straits Times article entitled, “Massive Construction Boom On The Horizon”. The article announced that at least $55 billion worth of construction projects is currently being undertaken or will be undertaken until 2021. Two of the more significant road projects are the $4.3 billion Marina Coastal Expressway and the $8 billion North South Expressway. Industry experts said the projects will cause a spike in demand for and costs of engineering expertise, foreign workers, building materials and equipment. Mr Or Toh Wat, the Group Managing Director of OKP Holdings, was interviewed in the article and he said that OKP has hired more people and added to its inventory of equipment in preparation for new contracts. He added that the coming years will be the busiest the industry has been since the last construction boom from 2007 to 2010 (when the two Integrated Resorts were built). The major road projects are as follows (some of them are already under construction):

• 5km Marina Coastal Expressway: $4.3 billion, ready by the end of 2013
• New underpass and widening of roads in Kallang: $254 million, ready by 2014
• Road tunnel linking Sentosa to the mainland, widening of surrounding roads: $537 million, ready in 2015
• Interchange connecting three expressways and the Seletar Aerospace Park: $255 million, ready in 2015
• Major arterial road from the Central Expressway to Yishun Avenue 6: $354 million, ready in 2015
• 21.5km North-South Expressway: between $7 billion and $8 billion, ready in 2020

The major rail projects are as follows (some of them are already under construction):

• 42km Downtown Line: $20.7 billion, ready in stages from 2013 to 2017.
• 1km North-South Line extension to Marina Bay: $357.5 million, ready in 2014.
• 7.5km Tuas West extension on the East-West Line: $3.5 billion, ready in 2016.
• 30km Thomson Line: $18 billion, ready in stages from 2019 to 2021.

In my opinion, the infrastructure boom certainly bodes well for OKP. I hope there will be opportunities for OKP to form joint ventures with major companies involved in rail construction to expand their revenue base. OKP have never undertaken a rail project so far. However, competition is intense in the rail projects segment since foreign companies from China, South Korea and Japan frequently bid for such projects. Many of the Downtown Line stations are currently being constructed by foreign firms.

OKP released their half-year results on Friday, 20th July 2012. I will not be analysing the numbers from the results in this post. Their results can be viewed from the SGX annoucement here. Rather, this post will be about my views of their results.

When comparing the yearly results (1HFY2012 vs 1HFY2011), their net profits dipped close to 50% and their cash flow from operations went into negative territory. This is a slight concern for me. However, OKP is a contract-based business and their profits dipped due to lower revenue recognition from their ongoing projects. It is better to look at full year numbers for such companies. A major $119 million CTE project they undertook is already completed and they need another such huge contract win to prop up their order book again. Having said that, their order book is actually healthy at $340 million with projects lasting till FY2014 but I’m still hoping for a major contract win.

In their press release statement, OKP has stated there are three projects likely to be awarded by LTA this year and they are for the expansion of Kallang Paya Lebar Expressway/Tampines Expressway Interchange, extension and reconstruction of Newton Flyover and construction of New Lornie Road. I believe OKP is bidding for this project since they mentioned the projects in their press release. If they are not bidding or had not bid for the projects, I don’t think they would cite the projects in their press release. PUB’s canal projects worth $750 million in total are also up for grabs and OKP will be looking to tender for those as they have expertise in canals construction and widening. I’ll be monitoring their order book closely. It will be extremely surprising if they do not win any of the contracts stated above, even though competition is getting keener. OKP has a solid track record and is a reputable local construction company.

Looking at a longer term, the construction of the North-South Expressway will be called for tender around 2015 and the total cost is around $7 to $8 billion (according to SIAS Initiation Report in May 2010). I believe OKP will be tendering for this project as OKP has expertise in building viaducts and around 8km out of the 14 km expressway will be viaducts (as mentioned in my post on OKP AGM). The Outer Ring Road System is also expected to start construction in 1st Quarter of 2013 (according to LTA site) but the tender results are not out yet. I’m not sure if OKP bid for this project as nothing about this project was stated in their press release. They have also recently ventured into the property development business but that will take a longer term to bear fruition though. I will not be expecting anything huge from there in the next one to two years.

On a side note, OKP won the Best Chief Financial Officer Award, Best Managed Board Award (Bronze) and Best Investor Relations Award (Bronze) under the ‘Companies with less than S$300 million in market capitalisation’ category at the recently concluded Singapore Corporate Awards (SCA).

OKP’s Annual General Meeting (AGM) for FY2011 was conducted on 25th April 2012 at their Headquarters at Tagore Building and I was there for it. This post will indulge in some of the more important points that were discussed in the AGM.

The AGM was held at the conference room and luckily, I arrived early to grab my seat in front of the Management. The AGM was slated to start at 11am and more people streamed in at that time. The room was not that huge and it was filled to the brim. Extra chairs had to be brought in and even then, a few people did not have seats and had to stand around. Mr Or Toh Wat, Group MD of OKP (“Management”, hereafter) said the turnout was bigger than previous year’s. This shows positively that more people are getting interested in OKP and the business prospects. Management said that next year, they will shift to another building where the conference room is much bigger. Next year’s AGM will be held in there.

Some of the more important points that were covered in the AGM:

• Property business – Won’t be going in a big wave and are currently looking for a partner to tie up with
• Competitive advantage of OKP – vast experience of over 100 years, solid track record with government bodies and  have been award contracts even if their bid wasn’t the lowest one
• A shareholder asked what allowed OKP to have 94% tender success in 2010. Management replied that LTA uses the price-quality method for tender evaluation to decide which company to award a contract to. (Under this method, “both price and quality criteria are assigned weightings which are then translated into quantitative scores. The tenderer with the best combined price-quality scores will be recommended for award of the contract. PQM also serves to assure the public that the procurement and tender evaluation processes take into account the non-price attributes and is not merely decided by the lowest compliant offer” (extract from LTA site). Also, “performance in past or ongoing projects in areas such as timeliness, safety and quality, relevant track records or specific competencies that enhances the tenderer’s suitability for the job” are also considered (extract from BCA site)).
• Material costs takes up around 80% of total costs and labour the other 20%.
• Some of the material costs are pegged with supplier to prevent fluctuations.
• The foreign worker levy increase’s full impact will be in 2015. However, the total increase in costs for OKP will be less than 1%.
• Now, 30-35% of the OKP’s foreign construction workers are under the core-trade, allowing OKP to enjoy a lower levy for them. OKP has plans to get 100% of the workers to be core-trade trained. Training the workers is essential to OKP.
• One shareholder asked in the long-term, what are the difficulties OKP will face. Management said OKP is dependent mostly on government projects (it bodes well for OKP if government is rolling out more public jobs in the future). Next, Management also said rising raw material cost can impact OKP. However, these factors are external in nature and cannot be controlled by OKP. What OKP can control is the training of the staff and as said earlier, OKP focuses a lot on training.
• Another shareholder asked between going into property development business  and overseas expansion, which is better. Management said for overseas expansion, need to choose  a good partner and have been exploring for many years for overseas expansion opportunities. Going into property development is a safer bet as it involves Singapore which the Management is more familiar with. Also, Management agreed that the local property market might be at the peak now. Thus, OKP is prudent on when to enter into the fray. If OKP wasn’t prudent, it would have entered into the property development business already. Lastly, Management said t’s their duty to enhance shareholder value and therefore, if doing business in Singapore is no longer viable, it will look for greener pastures overseas.
• For the North-South highway project, the whole highway is a total of 14km. 8km of it will be viaduct, 5km will be tunnel and around 1km of semi-tunnel. Building viaduct is OKP’s expertise but not the tunnels. LTA will probably open the project for tender in 2015 and project will commence in 2016. OKP might face stiffer competition from foreign companies if back in their home country, the economy slows down.
• Site managers and supervisors in-charge ensure that the workers are not talking on the phone and being unproductive during working hours. There’s a reporting system and work is monitored and measured. There are heads (something like foreman) put in place to look after each small group of workers. The heads are still foreign workers but with more years of experience.
• OKP assured the shareholders that it is all the while looking into increasing productivity of the workers.

After the meeting, I managed to ask Mr Or if the high margins seen in FY2011 is sustainable going forward. He said the high margins is one-off. The high margins seen were due to savings in some design-and-build construction projects. Overall, I got the feeling that Management is very prudent and knows what it is doing. I have more confidence in this Management after attending the AGM.

Pros

• Acceptable moat – only listed road specialist, many years of experience and track record
• Strong financials, FCF, ROE, margins
• Good dividend yield
• Even though undertaking mostly government projects, margins are high – shows management competence
• China Sonangol catalyst (construction of condos, overseas opportunities, can be acquisition target)
• Oil and gas industry catalyst
• Property development catalyst
• Overseas JV opportunities -$6.75 mil set aside for overseas business expansion
• Won huge project for CTE widening from LTA – shows competency and trustworthiness of the company
• Can acquire other smaller companies with cash hoard
• MRT contract catalyst
• Lots of awards won and in August 2010,  OKP made it to the Forbes Asia’s ‘Best Under A Billion’ List
• Highest order book in company history till 2014 and winning lots of contracts of late
• Construction expenditure by government usually increases during downturn
• Or Kim Peow, 76 years old and owns 55% of company. Potential general offer by China Sonangol which owns 14%?
• High success rate in tendering – 94% success rate in 2010
• PUB said it will commit $750m over the next five years to fight flooding. OKP won a Zion Rd canal contract in Aug 2011 so it has experience in this and can win more contracts.
• Opportunities like N-S expressway ($6-7 bil – starting 2013), Bukit Brown 4-lane dual carriageway (~$50 mil each package – 2013-2016), road around sports hub (<$1.3 bil – by 2014), widening/improvement of existing expressway.

Cons

• Competition from Singapore and overseas companies but with respect to road works and construction – however, even though there’s keen competition, each company will get a slice of the billion dollar pie
• Relying too much on government (especially LTA) for projects can be a double-edged sword
• Road development cannot go on increasing as stated in LTA masterplan – however, can be mitigated by property development, overseas joint venture and expansion that the management is currently looking into
• Exposure to labour shortage and foreign worker levy increase – OKP said it’s managing well and can pass on increase to customer
• Price fluctuations and availability of construction materials – for LTA projects, there’s a clause to claim the rise in material costs