18 February 2014 Stock1= Pick Chaw Sook Ting OKA Corporation Tel : +6(03)9207 7604 Email : [email protected] BUY Major Shareholders (%) Stock Information Company Description Target MYR1.70 Ong Koon Ann 48.9% Market cap (MYRm) 74.3 OKA is involved in the manufacturing of precast concrete products in Malaysia. Previous - Quah Seok Keng 3.4% Share Capital (m) 60.9 Ong Choo Ian 2.5% OSK 188 Ticker OKA Price MYR1.22 Industry Construction Riding On Buoyant Construction Sector We are initiating coverage on OKA with a BUY recommendation and MYR1.70 FV, pegged to FY15F 10x P/E, still below its 10-year average P/E of 15.6x. We like the company for its: i) prudent management, ii) strong presence in Peninsular Malaysia, and iii) solid earnings visibility, given its ability to ride on the infrastructure developments in Malaysia that have long gestation periods. Being one of the dominant sewage pipe makers in Malaysia, we believe that OKA could potentially benefit from the West Coast Expressway (WCE) project. Earnings growth is expected to remain strong over the next two years, underpinned by more orders and better margins. We expect a CAGR of 25.5% from FY13-15F. OKA is still trading below its NTA/share of MYR1.72 as at end-Sept 2013. Ipoh-based producer of precast concrete products. OKA is involved in the manufacture of precast concrete products in Malaysia, mainly catering to the infrastructure, sewerage, construction and highway industries. Headquartered in Ipoh, Perak, the company has six factories in Peninsular Malaysia, with two plants in Batu Gajah in Perak, and one plant each in Sungai Petani, Nilai, Senai, Johor and Kuantan in Pahang. Its Batu Gajah Perdana plant manufactures wire rods for its own use. Its plants have a combined production capacity of 660,000 tonnes of precast concrete products annually. Boost from infrastructure projects. We believe that the prospects of the construction sector will remain strong, underpinned by an extended upcycle driven largely by the MYR73bn Klang Valley Mass Rapid Transit (MRT) project. The Government is expected to focus on projects with low import content and high multiplier effects, such as the WCE, the refinery & petrochemical integrated development (RAPID) and the Gemas-Johor Bahru double track projects that were specifically mentioned in Budget 2014. There was no mention of any cancellation or deferment of mega projects when the Budget was announced in October 2013. In fact, the Government promised more infrastructure developments, such as development of more affordable homes, new expressways, rural developments, and so on. These are poised to boost infrastructure developments as well as accelerate the demand for basic material and related products. To potentially benefit from WCE project. WCE is a 233km highway that connects Banting in Selangor to Taiping, Perak. In a 3 Jan 2013 Star WCE SB CEO Datuk Neoh Soon Hiong said that the Government was in the midst of setting up a tender committee, and that work on the highway would probably start in 2QCY14. The WCE is scheduled to be completed in 2018. Being one of the dominant players in sewage pipes in Malaysia, we believe that OKA could potentially benefit by supplying the pipes and culverts to be used in WCE’s drainage system, as drainage is vital in road construction. A highway project would require proper drainage along its length to ensure road safety as well as to minimize maintenance problems. BUY, with MYR1.70 FV. We like OKA for its: i) prudent management, ii) strong presence with six plants located in various states in Peninsular Malaysia, and iii) strong earnings visibility, given its ability to ride on rising infrastructure developments in Malaysia that have long gestation periods. We expect earnings to be strong in FY14 and FY15, propelled by strengthening sales and better margins. We expect a 3-year CAGR growth of 25.5% in net earnings for the FY13-15F period. We are initiating coverage on OKA with a BUY recommendation and MYR1.70 FV, pegged to a FY15F P/E of 10x, still below the stock’s 10-year average P/E of 15.6x. The company is still trading below its NTA/share of MYR1.72 as at end-Sept 2013. FYE Mar (MYRm) FY11 FY12 FY13 FY14F FY15F Revenue 111.3 121.1 133.1 140.6 145.6 Core Net Profit 5.6 4.9 5.7 9.4 10.2 % chg y-o-y 45.1 -12.1 14.8 65.1 8.7 Consensus - - - n.a n.a EPS (sen) 9.4 8.2 9.5 15.6 17.0 Net DPS (sen) 3.0 3.0 3.5 4.0 4.0 Net dividend yield (%) 2.5 2.5 2.9 3.3 3.3 ROE (%) 6.2 5.3 5.8 9.0 9.1 ROA (%) 4.4 3.5 4.1 6.0 5.9 P/E (x) 13.0 14.8 12.9 7.8 7.2 BV/share (MYR) 1.51 1.56 1.63 1.74 1.87 P/BV (x) 0.8 0.8 0.8 0.7 0.7 RHB Retail Research / Market Dateline / PP 7767/09/2012 (030475) Page 1 of 10 Background Founded and led by Mr Ong Koon Ann in 1981, OKA is involved in the manufacturing of precast concrete products in Malaysia. The company supplies concrete pipes, concrete spigot, socket pipes, jacking pipes, box culverts, L-shape retaining wall units, U-shape drains, concrete porous subsoil pipes, ready-mixed concrete, concrete septic tanks, precast manhole components and industrialised building system (IBS), among others, to cater for the infrastructure, sewerage, construction and highway industries. Precast concrete pipes and U-shape drains are its main revenue contributors, accounting for about 70% of its total sales in FY13. Headquartered in Ipoh, Perak, it has six factories in Peninsular Malaysia, with two plants in Batu Gajah, Perak and one plant each in Sungai Petani, Kedah; Nilai Negeri Sembilan; Senai, Johor and Kuantan, Pahang. Its plant in Batu Gajah Perdana manufactures wire rods for its own use. Excluding its Batu Gajah Perdana plant, OKA has a combined production capacity of 660,000 tonnes annually. The company, which has a total workforce of 600 people, is currently running at about 50-60% of its total capacity at one shift per day. Figure 1: Locations of OKA’s factories Source: OKA, RHB Investment Case Infrastructure boost. We believe that the prospects of the construction sector would remain strong, underpinned by an extended upcycle driven largely by the MYR73bn Klang Valley Mass Rapid Transit (MRT) project. Given the scale of the project, its impact will be felt along the entire value chain of the construction sector, which would keep the sector busy until 2019. The Government has also reiterated that projects with low import content and high multiplier effects will be given priority. Given that the West Coast Expressway (WCE), the refinery & petrochemical integrated development (RAPID) project and the Gemas-Johor Bahru double track project were specifically mentioned in Budget 2014, we see these projects as having lower risk of being deferred. There was no mention of any cancellation or deferment of mega projects during the Budget 2014 announcement in October 2013. Furthermore, the Government has promised more infrastructure developments, such as building more affordable homes, new expressways as well as rural developments among others. These projects are poised to boost infrastructure developments and accelerate demand for basic material and its related products. See important disclosure notice at the end of report Page 2 of 10 Figure 2: Long-gestation projects and funding requirements from various economic programmes MYR 1.4trn, 92% of the funding to come from the private sector largely via the issuance of debt The 10-year ETP securities (a significant portion of which may require Government’s guarantee). Public-private P partnership (PPP) projects MYR115bn, funding mostly from the private sector, but with Government’s assistance. Iskandar Malaysia Corridor Significant capital investment put forth by investors, both local and foreign, estimated at MYR383bn. Sarawak Corridor of Renewable Energy (SCORE) MYR334bn, of which MYR67bn will be from Government funding and MYR267bn from private funding. Key Projects MYRbn Funding Sources Refinery and Petrochemical Integrated Development (RAPID) 60 Petronas KL - Singapore High-Speed Rail project 30 - 50 SPV Tun Razak Exchange (TRX) 26 IMDB+Foreigner Sg Buloh - Kajang MRT Line (Line1, Klang Valley MRT) 23 SPV Sg Buloh-Serdang-Putrajaya MRT Line (Line2, Klang Valley MRT) 25 SPV Circle MRT Line (Line3, Klang Valley MRT) 25 SPV River of Life 17 Abt 20% from Govt. Kwasa Damansara 10 EPF Gemas - Johor Bahru double tracking 8 Govt. allocation via development spending West Coast Expressway 7 Govt. soft loan of MYR 2.24bn Warisan Merdeka 5 PNB Pan Borneo Expressway 10 Govt. allocation via development spending Source: RHB, various media reports To potentially benefit from WCE project. West Coast Expressway (WCE) is a 233km highway across Selangor and Perak connecting Banting to Taiping (see Figure 3). WCE will be linked to some existing highways such as the North South Expressway (PLUS), Shah Alam Expressway (KESAS), KL-Kuala Selangor Expressway (LATAR), South Klang Valley Expressway (SKVE), and North Klang Valley Expressway (NKVE), among others. According to The Star report dated 3 Jan 2013, Datuk Neoh Soon Hiong, the CEO of WCE SB, said that the Government is in the midst of setting up a tender committee, and that physical work on the highway is expected to start in 2QCY14. The WCE is scheduled to be completed in 2018. Being one of the dominant sewage pipe manufacturers in Malaysia, we believe that OKA could potentially benefit from the WCE project by supplying pipes and culverts for its drainage system.