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Monday, January 26, 2015

OKA Corp - Solid Fundamentals With Growth Potential

We are feeling positive after our recent visit to OKA’s plant. We are maintaining our BUY call on OKA with an unchanged TP of MYR1.13, pegged to an unchanged FY16F P/E of 10x (25.6% upside). Our TP is justified by a sustainable margin, strong presence with six plants located in Peninsular Malaysia, potentially higher demand arising from flood repairs and continuous infrastructure developments in Malaysia.

Plant visit. We have recently met OKA’s management at its Batu Gajah plant. The >80 acres plant is flled with precast concrete products, waiting to be delivered to its customers. We expect potentially higherorders in 1QCY15 ahead of the goods and services tax (GST)implementation.

Potential to benefit from flood repairs. The severe floods in Kelantan, Terengganu, Pahang and Perak have caused damages to homes and infrastructure, including roads and drainage system. According to the revised 2015 Budget, the Government has provided an initial allocation of MYR500m to aid flood victims and will allocate MYR800m to the repair and reconstruction of basic infrastructure such as schools, hospitals,roads, bridges and other infrastructure. On top of that, it has also announced that it will allocate MYR893m under the 2015 Budget for flood mitigation projects. We believe that OKA might benefit from the rebuilding of flood-affected areas.

Margin remains intact. OKA enjoys higher margin from special products that it designs specifically for its clients. It managed to chart a higher net margin of 12.1% in 1HFY15, compared with 7.7% in 1HFY14. We believe that OKA is able to sustain the margin as the company is expected to supply the products to its clients continuously.

Maintain BUY, with a MYR1.13 TP. The fundamentals of the company remain intact. We like OKA for its strong presence in Peninsular Malaysia and better earnings visibility as it can ride on rising infrastructure developments in Malaysia. We are maintaining our BUY recommendation on OKA with a TP of MYR1.13, pegged to an unchanged FY16F P/E of 10x – still below the stock’s 10-year average P/E of 15.6x.

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