Gregory See of AGT Partners believes companies in the small- to-mid cap space hold the greatest potential for value.
He has previously profited from notable stocks like supermarket opera- tor Sheng Siong Group and Oiltek International , which was a top performing stock last year.
With the improving fundamentals in this sector, See is now targeting the construction industry for his next set of winners.
The pandemic has led to a number of contractors quitting, leaving those still standing to capitalise on the robust volume of work available, at least in the foreseeable future, by running their businesses more efficiently.
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“Sooner or later, the supply will catch up, but not yet, so it is still quite a sweet spot.
And if you can find a good company that has good gross margins, a healthy balance sheet and of course, a strong valuation at a very cheap price, then I think it is an okay investment to go for the medium term.”
One such stock, which See highlights, is OKP Holdings .
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As of Dec 31, 2024, its free cash and cash equivalents were $124.3 million, nearly equivalent to its market cap of $155 million as of March 4.
See adds: “Broadly speaking, few stocks have a very high amount of net cash on balance sheet as compared to market cap, or almost equivalent to it.
This doesn’t include the fact that some of them have investment security investment properties.
This gives them quite good recurring income, and the small amount of debt that is sitting on their balance sheet is actually backed by mortgages, backed by industrial properties or commercial properties, or in the case of OKP, shophouses.”
Furthermore, the fund manager likes that a third of OKP’s business comes from maintenance contracts.
This provides a stable base, in contrast to project-led order books, which can vary.
He likes Hock Lian Seng as well.
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“Their results are not as strong, but you look at the amount of cash and investment securities, they have equivalent to the market cap, and the business itself is still profitable.”
Although See says he has both OKP and Hock Lian Seng in his portfolio, he prefers the former slightly more, owing to its friendlier communication with shareholders.
Pan-United is another stock See favours, due to its strong dividends and rising share price, which he notes has increased by around 50% since his initial investment.
“From six to seven times multiple, now it's about 10 times because earnings went up, but not so much. So it is really about valuation re-rating.”
Overall, the fund manager notes that the construction sector as a whole is not undervalued, but certain stocks within are and have stayed undervalued for a long time.
“For us, when we go into something, we must be quite sure that the company’s management will at least let us see, from numbers and actions, that they are quite keen to commute value and share more to shareholders, minority shareholders. So when I see that, then I will say that a particular stock has potential for revaluation,” says See.
The main driving factor as an investor and fund manager, he continues, is whether or not a company has the aspiration to broaden and mature in its capabilities and earnings.
“This market will grow, and Singapore can definitely continue to boast the best infrastructure in at least the region. So, these construction players should come together and push each other. Stop squeezing each other’s margins; what's the point? I think as long as some of these entrepreneurs within the construction space, maybe the second generation, are willing to expand and double their earn- ings, then valuations will follow,” adds See.
If a company’s ROE, margin, balance sheet, and willingness to distribute cash or conduct share buybacks all fall into place, then See notes that the stock will prove undeniably attractive.
“I know some fund managers outside that really have a good motive and a good partner. If they can take a more meaningful stake in certain of these small to mid-cap stocks with good potential, the management of these companies should be telling themselves, ‘let’s use this chance of a lifetime, because we have the boost from MAS, let’s push our valuation up’, they should not wait.”
