This article first appeared in The Edge Financial Daily on July 31, 2017 - August 6, 2017

OKA Corp Bhd
(July 28, RM1.87)
Maintain buy call with a higher target price (TP) of RM2.10: We remain positive about OKA Corp Bhd’s prospects, driven by its well-established position as a precast concrete manufacturer with various manufacturing plants located throughout West Malaysia and its continuous efforts in diversifying its products.

We believe that the group’s bottom line may grow progressively as we expect higher demand from local infrastructure projects while cost-saving measures are being implemented.

We opine that construction activities would pick up from the second half of the financial year 2017 (2H17F) onwards, in which demand for precast concrete materials are likely to increase correspondingly.

While we expect the upcoming first quarter of financial year 2018 (1QFY18) results may likely be unexciting in anticipation of cyclical softer demand due to festive season breaks, we maintain our positive view on OKA Corp in the longer run.

Meanwhile, as the government appears to be keen on promoting the usage of the industrialised building system (IBS) in the construction industry, we expect organic growth in demand for precast concrete products to sustain in the medium to long term.

Likewise, we think that it may benefit from the IBS implementation as it has OKA IBS, an innovative building system that can be applied for residential, commercial and standard Public Works Department (JKR) buildings (such as schools, colleges and institutions).

Based on the 11th Malaysia Plan, the government remains committed to increasing clean and treated water coverage and expanding connected sewerage services in rural areas.

As a well-established sewerage pipe manufacturer, we believe OKA Corp may stand a chance to tap into these projects.

We revised our financial year 2018 forecast (FY18F) earnings upwards by 4.3%, after taking into account the group’s continuous efforts in cost-cutting measures and revising our rather conservative margin assumptions.

Meanwhile, based on our channel checks, cement prices remain depressed in view of tight competition from capacity expansion in the cement market. Hence, we do not discount the possibility of room for growth in our margin assumptions.

We reiterate “buy”, with a higher TP of RM2.10, after tweaking our margin assumptions and adjusting our FY18F price-earnings ratio (PER) valuation higher to 12 times, at its five-year historical +2 standard deviation level.

We opine that this valuation is justifiable, given that the group has shown improvement in cost management, a stronger balance sheet with a growing cash pile, and a solid financial track record led by a prudent management team. — RHB Research Institute, July 28