FULLY VALUED S$0.41;
Weak outlook ahead;
Price Target : 12-Month S$ 0.35 (Prev S$ 0.41)
•2Q13 below; gross margin collapsed 16ppts on higher subcontracting costs and low margin work
•Gross margins to remain depressed for at least another quarter; weak visibility for project wins
•Cut FY13F/14F earnings by 42%/12%
•Maintain Fully Valued with lower TP of S$0.35
2Q13 below expectations, gross margin declined by 16ppts. 2Q13 net profit plunged 77% y-o-y, 70% q-o-q to S$0.7m. While revenue came in at S$30.1m (+27.5% y-o-y, -6% q-o-q), gross margins declined by 16.1ppts as a result of higher subcontracting costs and low margin work. 1H13 earnings amounted to S$3.1m, accounting for just 30% of our previous forecast (net profit: S$10.1m).
Margins to be depressed for another quarter. The collapse in margins was affected by higher subcontracting costs, in particular construction work on Angullia Park. The project was mostly subcontracted to third parties, and yielded very low margins but yet contributed close to 20% of 2Q13 revenue. Angullia Park will continue to book in revenue till next quarter and we expect margins to continue to be depressed in 3Q13 as well.
Weak visibility for project wins. Project rollout by the government has been slow in 1H13. To date, OKP has secured only S$52m of contracts compared to our S$130m project win expectations for FY13F at the start of the year. Going forward, we expect project wins to come from the low value, low margin maintenance segment from 1) slow roll out of road works by LTA as it prepares to tender out work for the Thomson Line MRT; 2) continued roll out of drainage works by PUB to address flooding issues.
Maintain Fully Valued, TP S$0.35. We cut FY13F/14F earnings by 42%/12% as we expect to see weak margins for at least another quarter. Growth for FY14F will be driven by projects secured in FY12 and FY13, but we see pace of project wins slowing that will cause earnings decline in FY15F. Our SOTP-based TP is reduced to S$0.35. Maintain Fully Valued. We will be suspending coverage on OKP.
Publish date: 30/07/13