Summary

• We met with the management of OSK Holdings Bhd’s (OSK) on last Friday and came away feeling optimistic over their current operations and future plans, particularly in their property development and capital financing business segments. Meanwhile, contribution from the industries segment is expected to remain stable, while the hospitality segment is expected to remain in black over the foreseeable future.

• Property development segment a key contributor. OSK has achieved RM744.0m worth of sales in 9M22. This also makes up to 87.4% total sales recorded in FY21. For the final quarter (in recent 2 months to-date), we gather that sales momentum has turned softer, due to status quo ahead of Malaysia’s General Election 15 (GE15). We believe that it is a norm during election years whereby prospective purchasers will adopt the wait and see approach due to the political uncertainty that may result in the re-tabling of Budget (potential revision/changes of measures or incentives for the property sector). Still, we reckon that total sales for FY22 may come slightly above the figures reported in FY21.

• Looking ahead into 2023. OSK aims to rollout approximately RM1.00bn worth of gross development value (GDV) new launches. This comprises a healthy mixture from their (i) existing 2 townships located at Sg. Petani, Kedah and Seremban, Negeri Sembilan as well as (ii) several high-rise residential projects across Klang Valley. After acquiring some 89-ac of land (50-ac at Sg. Petani and 39-ac at Seremban) for a total of RM41.0m year-to-date, OSK will also remain active in their land banking replenishment activities, with the focus on lands adjacent to their 2 townships.

• Developments at Australia. Over at their development in Australia, the group aims to sell the balance of completed units (c. 80 units) of Phase 1 of Melbourne Square, while the soft launch of Phase 2 is expected to take place in March 2023. We believe that the rising interest rate environment may not deter demand for residential properties, but challenges to obtain financing will be on the fore.

• Capital financing gaining traction. We were surprised by the strong growth demonstrated from the capital financing business with loan portfolio surging to RM1.14bn in 9M22. Growth was mainly spurred by the strong demand from Sarawak-state owned Petronesa that provides financing services to civil servants and higher contribution from Australia that obtained the money lending license in 2H21. Moving forward, we expect growth to remain upbeat with loan portfolio size expected to hit RM1.76bn in FY24f (see Figure 1).

• Industries segment expansion. We gather that the electrical and power cable business segment is operating at maximum capacity and OSK will be bringing additional machineries to improve production output as well as efficiency in order to keep up with the solid demand. We expect mild improvement from the cables segment following the impending arrival of new machineries in 2023, while the Industrialised Building System (IBS) business contribution is expected to remain stable.

• Hospitality segment returning to black. Following the re-opening of economic activities, the tourism sector was rejuvenated and OSK’s hospitality segment returned to the black in 3QFY22. We expect occupancy rates to remain fairly stable, driven by the year-end festive seasons, while the improved airport passenger movements in 9M22 at 35.2m passengers also bodes well for the tourism sector.

Valuation & Recommendation

• We made no changes to our earnings forecast on the expectations of all-round improvement. We maintained our BUY recommendation on OSK with an unchanged target price of RM1.41. Despite the recent appreciation in share price, we note that prospective dividend yields at 5.1%-5.6% for FY22f-FY24f remains fairly decent for longer term investment perspective.

• 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 temporary 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 - 12 Dec 2022