Undervalued Builder in a Booming Sector: Hor Kew's Contrarian Opportunity

In the shadow of Singapore's bustling skyline and its relentless push for infrastructure, one small-cap construction player has quietly outperformed both its peers and the broader market. Hor Kew Corporation (SGX:BBP), a mid-tier player in the construction and prefabrication sector, has delivered a stunning 85.1% surge in earnings per share (EPS) in fiscal 2024, with a five-year compound annual growth rate of 34.8%. Yet, despite this performance, its stock trades at a P/E ratio of 3.9x—less than a third of the Singapore market's average of 14x. This stark disconnect between fundamentals and valuation suggests a compelling contrarian opportunity in an underfollowed corner of the market.

Earnings Recovery: A Tale of Margin Mastery

Hor Kew's financial turnaround is rooted in its ability to tighten margins while capitalizing on rising demand in the construction sector. The company's net profit margin expanded from 7.1% in FY2023 to 16.6% in FY2024, a transformation that outpaces the industry's 16.7% revenue growth. This margin improvement was driven by two key segments:
1. Prefabrication: The backbone of Hor Kew's operations, where it supplies high-margin concrete and metal components for train stations and HDB housing.
2. Property Development: A smaller but growing contributor, leveraging strategic land holdings for residential and commercial projects.

The company's Return on Equity (ROE) of 15.9% and Return on Assets (ROA) of 12.3% (implied from margin and asset turnover) underscore its efficiency. These metrics contrast sharply with the sector's average ROE of 11.4%, highlighting Hor Kew's competitive edge in cost control and project execution.

Valuation Dislocation: A P/E That Doesn't Make Sense

Hor Kew's valuation appears to defy logic. At a P/E of 3.9x and a P/B of 0.18x, the stock trades at a discount to its own historical averages and industry peers. For context:
- P/E: 3.9x vs. industry average of 15x.
- P/B: 0.18x vs. a 5-year average of 5.0x for Hor Kew.
- EV/EBITDA: 3.71x, well below the sector's typical range of 8–12x.

The disconnect is even more pronounced when considering the company's growth trajectory. Over the past three years, Hor Kew's EPS has grown at a 241% CAGR, far outpacing the projected 13% growth for the broader market. Yet, the stock remains priced for a recession.

Why Is the Market Discounting This Growth?

The answer lies in risk perception. Hor Kew's balance sheet is a double-edged sword. While its earnings have surged, the company carries a Debt/Equity ratio of 1.22 and a Debt/EBITDA of 49.51x as of FY2024. These metrics raise concerns about leverage, especially in a sector prone to cyclical swings. Investors may be pricing in the risk of margin compression or project delays, particularly as Singapore's construction demand, while robust at $44.2 billion in 2024, could face regulatory headwinds or cost inflation.

However, these risks are arguably overblown. Hor Kew's debt has been strategically used to fund high-margin projects, and its cash conversion cycle (implied from operating cash flow of S$21.05 million and EBITDA of S$21.05 million) suggests strong liquidity. Moreover, the company has demonstrated a willingness to optimize its capital structure, including recent injections of capital into key subsidiaries.

Contrarian Case for Entry

For value investors, Hor Kew presents a textbook dislocation. The stock's fair value estimate of S$2.68 (based on relative P/E and DCF models) implies a 126.9% upside from its current price of S$1.18. This potential is amplified by the company's positioning in the prefabrication segment, which is central to Singapore's push for sustainable and efficient construction. With the government prioritizing modular building techniques to meet housing and infrastructure targets, Hor Kew's expertise in this area offers a durable competitive advantage.

Risks to Consider

• Debt Sustainability: A sharp rise in interest rates or project delays could strain cash flow.
• Sector Volatility: Government-driven construction demand is subject to policy shifts.
• Valuation Re-rating: The market may not correct its undervaluation if earnings growth slows.

Final Take

Hor Kew is not a glamour stock, but it is a masterclass in margin discipline and operational efficiency. Its valuation discounts a company that has consistently outperformed the construction sector and delivered shareholder returns of 157.1% in the past year. For investors with a long-term horizon and a tolerance for volatility, this small-cap builder offers a rare combination of undervaluation and growth potential.

Investment Recommendation: A cautious buy for value-oriented investors who believe in the company's ability to sustain its margin expansion and leverage its prefabrication expertise. Monitor debt metrics closely and use pullbacks as buying opportunities.