Hor Kew (SGX:BBP): Sustained EPS Growth & Strategic Moves Signal Buying Opportunity

Hor Kew Corporation Limited (SGX:BBP) has quietly become a compelling contrarian play in Singapore's small-cap space, despite its stock languishing near multiyear lows. A 86% surge in fiscal 2024 earnings per share (EPS) to S$0.26, paired with strategic capital allocation and underappreciated catalysts, suggests the market has mispriced the company's value. Here's why investors should take notice.

1. Earnings Quality: Gross Margin Stability and Operational Efficiency

Hor Kew's FY2024 EPS growth of 86% (from S$0.14 in FY2023) is a stark turnaround for a firm that reported losses as recently as FY2020. The jump is underpinned by a stable 40% gross margin, maintained even as revenue rose 13% year-on-year to S$82.9 million. This margin resilience stems from:
- Cost discipline: Gross profit grew 46% YoY, outpacing revenue growth, reflecting operational efficiency gains.
- Strategic capital injections: On March 31, 2024, Hor Kew injected SGD 6.5 million into a key subsidiary, likely boosting its capacity in construction or prefabricated components. This move aligns with its focus on high-margin segments.

The 5-year gross profit CAGR of 38% (vs. a 13% revenue CAGR) underscores management's ability to scale profitability faster than top-line growth. While ROCE remains below the 11% industry average at 6.9%, this metric improved from negative figures in prior years, signaling progress in capital utilization.

2. Debt Management: Risks Mitigated by Earnings Growth

Critics have long flagged Hor Kew's debt burden. The Debt/Equity ratio rose to 1.22 in FY2024, and the Debt/EBITDA ratio spiked to 49.51, raising red flags. However, two factors suggest these metrics are manageable:
1. Improved interest coverage: With EBIT at S$7.2 million, interest expenses (assuming ~S$1.5 million) yield a coverage ratio of 4.8x, ample to service debt.
2. Reduced reliance on short-term debt: The current liabilities-to-total-assets ratio dropped to 33%, down from 41% in FY2023, indicating a shift toward longer-term financing.

While leverage remains elevated, the earnings rebound has created a debt cushion, reducing the urgency for costly equity dilution. The company's SGD 6.5 million capital injection into its subsidiary also signals confidence in its ability to fund growth without excessive debt.

3. Undervalued Catalysts: Transparency, Low Coverage, and Dividends

Hor Kew's potential upside is amplified by underfollowed catalysts:
- Auditor change: The shift to Moore Stephens (effective late 2024) signals a commitment to transparency. This move, which triggered a 5% share price surge on Dec 13, 2024, may rebuild investor trust.
- Dividend sustainability: The proposed S$0.03 per share dividend (6.52% yield at current prices) reflects strong free cash flow. If approved at the AGM on April 30, 2025, it could stabilize the stock price amid uncertainty.
- Low institutional coverage: With insufficient analyst coverage, the stock is ripe for a valuation re-rating as more investors discover its fundamentals.

4. Compelling Valuation: A Contrarian Buy at 0.77x P/E

At its recent closing price of S$0.20, Hor Kew trades at a P/E of 0.77x, far below its 3-year average of 5.0x (and a peak of 32.93x in 2022). This compression ignores:
- Strong EPS momentum: A S$0.26 EPS implies a forward P/E of 0.77x, a historic discount even during low-growth periods.
- Dividend yield: At 6.52%, the dividend alone covers more than a third of the stock's price.

The P/B ratio of 0.18x also suggests the market undervalues its assets. For contrarian investors, this is a low-risk entry point ahead of potential catalysts like dividend approval or analyst upgrades.

Conclusion: A Strong Buy for Value Hunters

Hor Kew's stable gross margins, debt-mitigating earnings growth, and undervalued catalysts create a compelling contrarian opportunity. While risks like sector cyclicality remain, the S$0.20 price offers a margin of safety with potential upside of 50-100% if the market recognizes its value. Investors should buy now and wait for the re-rating—this is a stock poised to reward patience.

Rating: Strong Buy
Price Target: S$0.30 (50% Upside)

Disclaimer: Past performance does not guarantee future results. Investors should conduct their own research and consult financial advisors.