We currently have a BUY rating on OKA Berhad (upgraded from Neutral after the share price decline). Our target price of RM 1.43 implies an upside potential of 23.3%. We continue to like OKA for its robust cash flow generation relative to the peers and above average profit margins. While the market is struggling to digest the effect of post-trump trading conditions, OKA is not affected due to the low reliance on US economy.

Looking ahead, we believe the company’s outlook will be positively supported by domestic construction needs especially the infrastructure. The key catalyst to look for is the historic high-speed rail deal between Singapore and Malaysia signed in December 2016. The travel from Singapore to Kuala Lumpur will take 90 minutes of which the target completion date is by the end of December 2026. OKA might be the beneficiary, and if this materialised, it could support the medium-term earnings visibility on top of the existing and future orders. The project cost is estimated to be around RM50billion to RM60 billion.

As the project will eventually lead to the creation of many jobs (of which the number is currently uncertain), it will have a positive contagion effect to other industries particular the property and industrial product sectors hence possibly further enhance the earning outlook.

 

OKA Berhad is trading between the average and minus one standard deviation. We opined that current price does not look too expensive although the share price has increased significantly.

 

However, the P/B band revealed that it was trading above plus one standard deviation and through the decline in share price, it is gradually reverting back to the mean. At P/B of close to 1.2x, we do not deem it as overvalued due to its above average return on equity hence it deserves some premium over its asset value. Overall, we are of the opinion that the share price has some upside potential (Refer to our equity research for the valuation methodology).

For discussion of OKA’s Q2 FY17 result, click here.
For equity research, click here.

The key investment risks are discussed in the links above.

Disclaimer: The views above are opinions based on facts and subjective judgements. Yield Mountain (including the contributors) does not take any responsibility (be in monetary or non-monetary) for any actions rely on the information discussed.

 

http://www.yieldmountain.com/2016/12/27/financial-commentary-oka-berhad-dec-16/