Value Investing

OPK Holdings Valuation And Singapore’s RE Craze

We recently gave an interview with MoneyFM and shared our thoughts on OKP Holdings. You may listen to the podcast in the link below, otherwise, a short summary is below.

https://omny.fm/shows/money-fm-893/co-to-watch-okp-holdings-goh-tee-leng-heritage-glo

Property Craze

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The recovery in the property sector is definitely here evidence by all the enbloc news we are reading today, this has resulted in valuations of property developers to run up quite abit. Due to this, we do not actually see much value in investing in the property sector anymore but rather we rather focus on the construction and engineering segment, which benefits from the recovery in the property market. One such company that we actually like is OKP Holdings.

What does OKP Holdings do?

OKP Holdings is primarily a leading player in the civil engineering sector and in recent years they have been making headways into the property development industry throught joint ventures with other more established property developers and some of their property projects are Lake Life and Amber Skye.

Over the past 51 years of operations, OKP has definitely built a track record in public and private infrastructure works with key clients in the public sector like LTA and PUB and the private sector like Changi Airport Group and ExxonMobil.

What do we like about OKP Holdings?

Our strategy is one where we prefer investing in companies that are in industry starve of capital, that is in its downtrend and have more of less bottomed up.

Which is like the saying that goes, ‘spring may not be here, but winter is definitely over.’

However, the key things when investing in such companies are that we want companies that are fundamentally sound, little/no debt and trading at very very cheap valuations.

For OKP, it is trading at 0.88x BV, a 27% discount to its historical average PB ratio of 1.12x. It has negligible debt – debt to equity of only 2%, a net-cash position where it sits on a cash hoard of approximately 70% of its market capitalisation. Hence, we find that with these factors it makes the company a very likely candidate to ride the recovery in the construction and engineering sector.

Furthermore, we see it as an opportunistic buy after the unfortunate accident at the Tampines Viaduct worksite that claimed 1 life and injured 10 people; hence, this resulted in the decline in stock price of around 14%. This led us to see the asymmetrical risk reward ratio to be in our favour.

Does the accident worry us?

The current stock price is depressed due to the uncertainty revolving the accident pending its findings, which may result in legal or monetary implications and may even result in the company facing disbarment for a few months where they are unable to hire new workers during that time frame.

However, the key question one has to ask would be if this one accident means that OKP is an average contractor.

To answer that question, one has to understand the process when OKP wins a tender to the point they actually finish building the project. The process is not one without checks and measures but it has many layers of checks by different independent agencies. Furthermore, throughout this whole incident, OKP has dealt with it very well – never once pushing the blame but working closely with the government authorities to understand what where wrong and to prevent such an incident from happening again.

Lastly, it is in my opinion that it is unfair to judge the company based on one incident compared to all their other successfully completed projects in the past 51 years of operations. While the company may face some hiccups in the short term but as long term investors I am more than certain that the company would emerge from this stronger than before.