A Detailed Investment Research Of OKA Corporation Berhad

OKA Corporation Berhad 

Industrial Product | Concrete manufacturer 

Stock Code: 7140.KL Malaysia 

NEUTRAL 

• Current Price RM 1.32
• Target Price RM 1.43
• Est. Upside Potential 8.7%
• Market Cap RM 209.70m
• 52-week Range RM 0.83 – RM 1.38
• Average Volume 322,410 (Source: FT)
• Shares Outstanding 158,866,000
• Free float 37.90% (Source: FT)
• Beta 0.94
• Valuation Basis Discounted Cash Flow

Investment Considerations

1) Slowing housing market might be compensated by infrastructure growth

The industry is largely fragmented with large players such as Chin Hin and Lafarge control less than 13% of the market share (Source: IMR report). OKA Berhad does not command any meaningful market share in both domestic and regional market. Uncertainty around the oversupply of housing in Malaysia may be balanced by high domestic infrastructure needs. Limited geographical operations leads to limited exposure to regional development (which we expect will continue to remain active) may weaken its competitiveness. In view of the above, we have factored in a moderate growth in our valuation.

2) Good fundamental with clean balance sheet and strong cash flow generation

Despite the share price has experienced a quantum leap in recent months, we believe it is justifiable given its improved cash flow and fundamental. We compared it with three identified competitors. OKA Berhad outperformed in most of the metrics. Profit and cash flow margins were in double digit range with growing trend. Peer comparable points out that its competitors are quite highly leveraged and their interest coverage, although adequate, weaken their cash flow generation hence giving OKA Berhad an edge as it is currently debt-free and allow excess cash for potential expansion plans and expand into new product range. P/E and EV/EBITDA are currently trading at 9.28x and 5.00x respectively, which we deems as reasonable.

3) Attractive valuation with good upside potential

Although we have a neutral rating on the company, it is largely due to our conservative estimations as well as the market is very likely to trade sideways (as it is currently at new high) until next positive quarterly result comes out, we view the long term prospect favourably given the company is able to sustain its cash flow generation (FFO and FCF margin of no less than 10%) with moderate revenue growth (no less than 4%). Our base case scenario suggests an upside potential of c.9% while best case scenario is c. 40%.

Peer Comparable

Chin Hin – Provider of building materials such as ready-mixed concrete, pre-cast concrete and mesh and steel bar.
Sarawak (SCIB) – Concrete products manufacturer, installation of building system components and property trading.
Concrete (CEPCO) – Pre-stressed spun concrete piles and poles manufacturer, also provides other construction related services.

Key Takeaways from peer comparables: 

• Based on the 2 FYE results, we can approximately conclude that OKA Berhad has strong cash flow and profit generation. It is worth noted that FYE 16’s significant improvement was mainly attributable to lower cost of sales which we need to determine the sustainability in its upcoming financials. Even disregard such improvements, FCF margin of c. 9% and FFO margin of 12% are still considered strong.
• Strong liquidity position with low leverage strengthen its position should there be any adverse in trading conditions.
  • The competitors have leverage of above 3x (as measured by Debt / EBITDA) and interest coverage of around 3x to 5x which suggests significant portion of its operating profit goes toward to debt financing hence further weaken its free cash flow generation.
• We do acknowledge that there are many changes since the last FYE (in terms of share price performance) hence readers must understand that the valuation metrics are based historical and not based on the latest share price. Based on the two FYE, OKA has been priced quite cheaply relative to the market despite of its significant strong financial performance relative to peers.

More Detailed Report

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  OKA

Investment Research Disclaimers 

• The opinions and views expressed in this report are solely of the analyst.
• Any projections or estimations may not be accurate. Market conditions and assumptions could result in materially different outcomes.
• Past performance is not necessarily an indicative of future performance and the analyst will not accept for any loss arising from information contained in this report.
• This report is not intended as an offer to buy or sell the securities discussed.
• Seek independent advice to understand the investment risk arising from taking investment actions based on this report. Consider your unique circumstances (such as time horizon, liquidity and risk tolerance) before investing as not all investment are suitable for every investor.
• The analyst currently has no financial interests with the company analysed in this report. The company has not paid the analyst to write this research.
• The analyst currently has no shareholding in the company analysed in this report.
• The analyst may invest in the company analysed in the future but will only do so after 48 hours of publishing of this report.

This research is provided by Jackson Yuen, a credit analyst at the Bank of East Asia. He is passionate about credit analysis and equity research. He is currently analysing listed companies in Malaysia to provide Malaysian investors with more comprehensive analysis. Due to the nature of his work, he focuses heavily on the cash flow generation and the sustainability of the capital structure. Please visit his website.