Summary

• OSK Holdings Bhd’s (OSK) 1QFY22 net profit fell 25.9% YoY to RM86.3m, dragged by lower contribution from the property development segment as projects launched in 2021 are still at infant stage of construction whereby billings may only pickup in subsequent quarters. Revenue for the quarter declined 5.7% YoY to RM306.5m.

• The reported earnings make up to 20.8% of our forecasted net profit of RM414.1m. We reckon that the figures to be in line as earnings growth may play catchup in subsequent quarters in tandem with the economic recovery. Meanwhile, the reported revenue was at 25.0% of our forecasted revenue of RM1.22bn.

• Moving forward, OSK’s property development unbilled sales of approximately RM885.0m will sustain earnings visibility over the next 18-24 months. We note that OSK achieved total sales of RM183.0m during the quarter. In the meantime, balance landbank at 1,967-ac that carries and estimated gross development value (GDV) of RM14.70bn will keep the segment busy over the long term.

• Occupancy rates at Plaza OSK, Faber Towers and Atria Shopping Gallery remains relatively healthy will generate stable recurring income, while the construction segment will be supported by an outstanding orderbook of RM211.0m (for their on going property development projects). With Malaysia transitioning into the endemic phase, we reckon that the industry segment is expected to deliver improvement on the back of smoother construction work progress. We also note that the loan portfolio remains stable at RM906.0m.

• On the other hand, the hospitality segment is expected to remain challenging, albeit there are signs of green shoots of recovery. Given that the international arrivals are still modest, we think that domestic travelers will play an integral role to boost occupancy rates. Under the prevailing scenario, near normalcy level may only be achievable towards 2023.

• Overall FY22f performance may continue to deliver improvement, on the back of (i) progressive recognition of unbilled sales that is supported by gradual new launches with estimated GDV of RM1.30bn, (ii) stable loan portfolio and (iii) dividend income from strategic investment in RHB. Property sales are expected to remain resilient, premised to their strategic planning through prudent launches in bid to avoid large chunk of unsold inventory, coupled with their affordability for the mass market.

Valuation & Recommendation

• Given that the reported earnings are deemed to be within expectations, we made no changes to our forecast. Therefore, we retained our BUY recommendation on OSK with an unchanged target price of RM1.41.

• We adopted a sum-of-parts valuation by pegging 0.8x to its financial services and property development book value, while the construction, industries & hospitality segments are valued through P/E multiple of 9.0x based on their earnings potential in FY23f. The discount to its book value in both the capital financing and property development is to reflect the OSK smaller scale business against pure-play property and financial services players.

• Risks to our recommendation include weaker-than-expected property sales which may put a brake onto the progress of future launches. Potential default by their borrowers may result in slower contribution from the capital financing business segment.

Source: Mplus Research - 31 May 2022