OKP Holdings

[VIChris]

hi VIChris,
i think FFNow may be referring to that OKP's main customer is LTA, so there is little diversification in terms of customer base.

Hi Weijian thanks, I am aware of what FFNow is trying to say that's why I have mentioned about OKP strategically positioning on non-government projects.

Cheers

[dzwm87]

Hi dzwm87,
thanks for the analysis, but trying to understand, on your last page of analysis on Debt per share basis, what is the objective of this values trying to indicate since the gearing ratio of this company is near zero?

FFNow, if you are aware, government projects are always safe. These projects are unlikely to be cancel as budgets has been set aside.
Unlike commercial one which is affected by economic conditions, project s can be cancel.

If you noticed, OKP has strategically positioning themselves in high net margin projects, ranging from extending their capability from government projects to Oil & Gas, property development, etc.

The intrinsic value of this company at zero growth is still higher than the current price.
Nevertheless, this is only my own personal opinions.

My 2 cents.

VIChris, may I know what's the intrinsic value?

[VIChris]

Hi dzwm87,
taking a 0% growth at 4% inflation, the IV is at $0.60 (this is my conservative value).

Appreciate if you could share with me on your view on Debt per share basis and your calculated IV?

[dzwm87]

Hi dzwm87,
taking a 0% growth at 4% inflation, the IV is at $0.60 (this is my conservative value).

Appreciate if you could share with me on your view on Debt per share basis and your calculated IV?

care to elaborate on how you arrive at $0.60 using 0% growth & 4% inflation?

for "debt per share", i think you're referring to the last table? Think my table heading might have confused you. It's actually calculating net net cash per share, which i then reduce off from OKP's last done share price & then calculate out the P/E ex. net net cash position since all these remaining cash (after netting all liabilities) is idle.

I don't have a specific IV calculation & I don't normally do that unless the company has a very very predicted cashflow. What i normally do is to set a few "hurdles" or "criteria" which is in fact my margin of safety. I then buy a company based on a few reason and only sell them once these reasons are no longer there. For instance, if I am to be vested in OKP, its high order book will be one of the catalysts which I feel can re-valued its price. However, if subsequent years, OKP fails to clinch any big contract, I might consider selling it.

*not vested in OKP*

[VIChris]

Hi dzwm87,
I calculated the intrinsic value using both discounted cash flows and discounted earnings.
The margin of Safety is at 59% based on last Friday closing price.
The growth rate for the next 10 years are assumed to be the same as the average growth rate of the past 10 years, and the terminal values of the businesses are ignored.
The formula is well documented in varies books and in the internet.

I believe OKP has quite a predictable cash flow and earnings from their book orders until 2014.
The free cash flow, Cash and Cash Equivalents less debt and predictable net profit margin are good indications of the cash flow position of a company in the next 3 years.

Some of my criteria which I adopted in investing includes:
1. Management
2. Industry
3. Whether they are the market leader and their strengths and weaknesses
4. Financial Report and IV
5. Insider news (if available)

I am vested in OKP.

Thanks for sharing.

[dzwm87]

Got to say OKP has one of the better IR department in Singapore.

Sent them a few questions and here are their replies:
Q1. I observed from your quarterly results that ever since 4Q FY10, y.o.y % growth for revenue has
declined while % growth for COGS has declined even more. Regarding to this, may I know:
- why is y.o.y comparison for revenue been declining ever since. Is it due to transition of new
construction contracts?

A1. The decrease in revenue from both segments was due mainly to the completion and substantial
completion of existing projects, coupled with a lower percentage of revenue recognised from a few
newly-awarded projects in the previous corresponding reporting period.

Q2. How did COGS consistently decline more than the fall in revenue? You attribute this to better
management in cost savings. May you elaborate further on this? For instance, what kind of cost
savings has OKP implemented & will such practices be easily copied by your competitors?

A2. The drop in COGS translates into improvements in gross profit. These were mainly due to better
project management eg. proper site planning, detailed planning in the construction processes,
effective site management; and tighter cost controls eg minimise construction material wastage at
site, employ effective methodologies in every stage of construction. In addition, recent contract wins
hold clauses which allow OKP to renegotiate prices in the event of materially higher material costs,
protecting our margins. In addition, for design & build projects, like the CTE project, gives OKP
autonomy and flexibility in design, project management and labour management, helping to boost
margins further. Other reasons include variation orders and changes in design and we have been.

Q3. Also, OKP seemed to be holding onto a significant amount of cash (S$95.8 million in 9M FY11). Are
these cash idle? Or does OKP normally need to pay a tendering deposit for your contract work? If
the cash are idle, what's OKP's plan for its utilisation? Will it mainly be allocated for the property
venture with China Sonangol?

A3. OKP has always been prudent in its approach to business operations. With regard to tenders, OKP
does incur some associated costs but these are dependent on the nature of the tenders, and so far,
the amounts incurred have been minimal.
OKP has a clean and strong balance sheet, with no debt and strong cash position. We have already
signalled the intention to start a property development unit, and we can tap on the cash in the event
that a significant opportunity presents itself.

Q4. What is the progress with regard to the property venture with China Sonangol? Also, what is the
prospect regarding it given the bearishness over Singapore property market?

A4. As China Sonangol is one of our larger shareholders, we continue to engage them on an on-going
basis in the normal course of business for any business opportunity and/or collaboration that could
arise.
As for the Singapore property market sentiment, we continue to be vigilant, monitoring market
developments closely. We believe that there are still business opportunities, and we shall be
extremely cautious in taking our initial steps in this area. We take a long-term approach, and we
believe that in the long term, this is still a viable business for OKP.

-------------------------
Questions were sent over by e-mail, so I didn't really want to flood them with too many questions. Haven't done any analysis on it yet. But in fact, do have more questions more.. :x e.g. does competitors get to enjoy the contract clause which they stated? Maybe we can compile a set of questions and send it to them.

---

Hopefully OKP can win the tender for the NS expressway, and if that contract has the clause for material cost compensation, then it might be a big catalyst for revaluation!

*not vested in OKP*

[Thriftville]

Hey buddies,

OKP seems very good with net margin of over 10%. I've seen other gov contractors, usually manage to get less than 5% net. Care to share what's the competitive advantage of OKP? How they manage to secure such a high margin?

Thank you!!

[dzwm87]

Hi Thriftville,

under the following questions:

Q2. How did COGS consistently decline more than the fall in revenue? You attribute this to better
management in cost savings. May you elaborate further on this? For instance, what kind of cost
savings has OKP implemented & will such practices be easily copied by your competitors?

A2. The drop in COGS translates into improvements in gross profit. These were mainly due to better
project management eg. proper site planning, detailed planning in the construction processes,
effective site management; and tighter cost controls eg minimise construction material wastage at
site, employ effective methodologies in every stage of construction. In addition, recent contract wins
hold clauses which allow OKP to renegotiate prices in the event of materially higher material costs,
protecting our margins. In addition, for design & build projects, like the CTE project, gives OKP
autonomy and flexibility in design, project management and labour management, helping to boost
margins further. Other reasons include variation orders and changes in design and we have been.

[Thriftville]

Hey dzwm87, thanks for your reply!
OKP competitive advantage seems easy for competitors to match-up... are they the largest contractor in this segment?
that helps them to get economies of scale...

[dzwm87]

that's why one of the other concerns arising from their answers is that whether other constructors are entitled to such contract clause as well.

If it's due to OKP's strong branding which ensure them to be able to command for such a contract premium, then I think it's a reasonable competitive edge as we don't really see other constructors commanding such close margins