Friday, 14 July 2017

Value Investing - learning from OKP's flyover collapse

Who is OKP?

OKP Holdings Limited is a company listed on Singapore Exchange. While the company also dabbles with property development and investments, their primary business remains public sector infrastructure construction and civil engineering.

How has OKP performed?

Source: Yahoo Finance

OKP's share price has performed admirably in the past 2 years, surging 126% from S$0.19 to S$0.43 before the fall in share price after the incident.

Indeed, the investment thesis for OKP was rather straightforward. Singapore's infrastructure demands are growing steadily and firms that win tender do not have to worry about receivables. When we consider OKP's reputable history of garnering these public infrastructure projects at very fair margins, there appeared to be little worth worrying about.

What happened?

OKP was awarded a S$94.6M project to construct a viaduct from Tampines Expressway (“TPE”) to the Pan Island Expressway (Westbound) and Upper Changi Road East in November 2015. In the wee hours of 14th July 2017, the unfinished viaduct collapsed, killing 1 and injuring 10 others.

(This is a tragic accident which should be thoroughly investigated. My thoughts and condolences goes to all foreign workers impacted by this incident)

OKP's share price promptly tanked 8% before the firm called for a trading halt. It is highly likely that the firm's share price will continue diving once trading is resumed as any expectations of big contract wins are now replaced by big fines slapped on the firm.

The value investor in me was immediately triggered: If a safe, defensive play like OKP (and rival Hock Lian Seng, which I am vested in) can screw up so badly, can we ever realistically find sufficient margin of safety? After some thought, I came back with 2 back-to-basic learning points.

Reminders for Value Investors

1) Nothing beats hard work

While difficult, value investors could have sniffed out OKP's construction woes. OKP was involved in a widely reported Yio Chu Kang flyover incident in 2015 (here) and was recently reported to be fined S$250,000 for that incident (here). 

MOM also maintains a list of contractors with demerit points, which OKP is listed on:

Source: MOM (here)
However, while that might have been the case, it would have still been difficult to fault value investors' investing in OKP as OKP had actually consistently won contracts while all these were going on.

Source: SGX Company Disclosure, past 12m for OKP

This brings me to the next point.

2) Diversification is important

There is no one stock that is 100% safe. No matter how great and safe a company's business or moat is, freak accidents do occur - simple as that.

While I agree with Buffett and Munger that over-diversification can be very detrimental towards any plans of achieving market beating returns, this incident has reinforced to me that some degree of diversification is indeed required to maintain true margin of safety. 

Well, my musings aside, perhaps this might be an opportunity for contrarian investors with strong convictions on this counter?

This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this blog post be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of Dan O (“the Author”); is merely the written opinions and ideas of the Author, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Author make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Author, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

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