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KOH BROTHERS: Expanding its reach in infrastructure and precast businesses
Written by Leong Chan Teik
Sunday, 17 November 2013 12:08
 Marina Barrage is one of the most iconic projects built by Koh Brothers in Singapore.Photo: http://blog.wenxuecity.com KOH BROS has been acquiring back its shares at a steady pace, having accumulated 13.4 million treasury shares already which signals that it considers the stock (30 cents recently) to be undervalued. It' s a view that billionaire Koh Wee Meng of Fragrance Group might agree with. After all, he too has been acquiring Koh Brothers shares: as at 20 March 2013, he owned 15 million shares, or a 3.26% stake, according to the annual report 2012. As of annual report 2011, his name did not appear in the top 20 shareholders list (the 20th shareholder held 1.4 million shares). This means he bought most heavily between March 2012 and March 2013. The stock currently trades at 6.4X earnings, 0.66 price/book and 1.17% dividend yield, according to Bloomberg' s 12-month trailing data. Koh Bros has made two deft moves of its own, as we gleaned from an interview this week with Francis Koh, its MD and group CEO.  Francis Koh, MD and CEO of Koh Brothers -- he also became non-executive chairman of Metax Engineering in Mar 2013. Photo by Leong Chan Teik1) Acquisition of 41% stake in Metax EngineeringCompleted in Feb this year, the investment has started to show benefits for both companies. Brief background: Koh Brothers, a property developer and contractor and building materials supplier, bought the 155-million-share stake for $8.215 million cash and was issued 165 million warrants for nil consideration. The Metax shares were purchased at 5.3 cents, They recently traded at 7 cents. The warrants can be exercised at 5.3 cents each over three years. The rationale for acquiring Metax was described by Mr Koh in a press release then:
&ldquo An established market player with over 35 years of experience in providing EPC services to the water and wastewater sector, Metax is exactly the type of acquisition we seek to scale up the Group&rsquo s specialist engineering capabilities. Moving forward, we will continue to explore and evaluate earnings-accretive options, both organically and through synergistic M& As, to enhance the Group&rsquo s capabilities and to enhance long-term shareholder value.&rdquo Koh Bros previously had secured water treatment and water-related projects, such as the Marina Barrage, and then awarded a sub-contractor' s role to Metax.  Koh Bros' CFO, John Lee.Metax' s water-treatment business is loss-making as it has fixed costs that are too high for the low volume of work on hand. Aside from cutting headcount with the idea of retaining only the core expertise and outsourcing the rest of the work in future, " we have gone in to reorganise, improve the work processes and improve the corporate governance in order for the company to turn around next year," said Mr Koh. Koh Brothers is certain of benefitting from Metax' s new projects going forward -- specifically Engineering, Procurement & Construction in the water-treatment sector. After all, Mr Koh has assumed the post of non-executive chairman of Metax. With synergies arising from working together, in Oct this year, Metax won a S$6.7m job to expand Singapore&rsquo s only greasy waste receiving facility in Jurong. Metax has another core business via its 80% stake in Oiltek Sdn Bhd, which does EPC for palm oil refining systems for Malaysian clients such as Sime Darby, Wilmar, IOI and Felda, and others in 25 countries. Oiltek is doing well with RM5-7 million in profit a year on revenue of RM100 million or so. " We hope that Oiltek can one day go for a listing on the Malaysian stock exchange," said Mr Koh. Metax reported a pre-tax loss of S$12.2 million in HY2013 as compared to a gain of S$0.3 million in HY2012 mainly because of one-off items.
 Koh Bros' new precast plant in Iskandar will cater to strong demand arising from a ramp up in public housing supply in Singapore and the development of Iskandar Malaysia. Photo: Company2) Pre-cast plant in IskandarAbout 1.5 years ago, Koh Bros bought land in Iskandar to set up a pre-cast plant. It expects to ramp up production in the S$13-m plant early next year, with full production targeted for mid-2014. This will double Koh Bros' capacity to 150,000 cu m, of which 10% will be sufficient for its own construction projects and the remaining 90% would be sold to third parties. If fully sold, the pre-cast components can possibly fetch up S$100 million in revenue a year, assuming an industry average selling price of S$900-$1,000 per cu m. Net profit could then amount to about S$10 million a year, assuming 10% net margin. For some perspective, the Group' s net profit in 2012 was $19.7 million. Koh Bros did not reveal its revenue and profit from the sale of components for FY2012 but in an interview in The Edge weekly last month (Oct), Mr Koh was quoted as saying that the sale of precast materials contributes 5-10% of the group' s net profit currently. Will there be enough demand for its increased supply of pre-cast products? " There' s currently under-capacity in the market," said Mr Koh. " Most of the demand will come from HDB projects. The government has been pushing for pre-cast usage a long time ago and with the additional productivity drive, demand for pre-cast will go up even more." It' s a sweet spot that Koh Bros is in, especially considering that it lost money in the first few years after it started 10 years ago on pre-cast production. |