Summary

• We met with the management of OSK Holdings Bhd (OSK) recently and came away feeling re-assured over their current operations and future plans. We gather that contribution from the property development segment will remain as the key revenue driver, supported by several new launches in the pipeline across Klang Valley and Penang, coupled with their on-going 2 townships in Seremban and Kedah.

• Property development segment remain as biggest revenue contributor. OSK raked in RM946.0m worth of new sales in FY22 (RM851.0m recorded in FY21). For FY23f, we reckon that the total new sales may come in softer between RM850-900m as the property market turns un-exciting following the absence of fresh incentives under the revised Budget 2023. With the rising cost of living alongside with higher interest rate environment which eroded Malaysians’ purchasing power, we reckon that affordability remains a key issue for the property market.

• New launches in pipeline. OSK aims to rollout approximately RM1.33bn worth of gross development value (GDV) new launches in 2023 in Malaysia, subject to the market conditions. This comprises a healthy mixture from their existing 2 townships located at Sg. Petani, Kedah and Seremban, Negeri Sembilan as well as several highrise residential projects across Klang Valley and Penang. Elsewhere, Phase 2 of Melbourne Square comprising 614 units with c. AUD$600.0m in GDV is expected to launch in 2023.

• Still active on the lookout. After acquiring a total of 90.0-ac of land for RM42.4m at Sg. Petani and Seremban in 2022, the group remain active in their land banking replenishment activities. Moving forward, OSK is equipped with a total landbank of 2,003-ac with an estimated GDV of RM16.30bn to sustain the property development segment’s revenue over the long run.

• Capital financing demonstrated strong growth. We gather that loan portfolio continues to chart new heights towards RM1.40bn as at end-FY22. We expect growth to remain fairly stable with loan portfolio size expected to see sequential improvement to RM1.58bn in FY25f, driven by the growth in both Malaysia (new products offerings such as the shariah compliant financing) and Australia that kickstarted from a low base since 2021.

• Recovery in hospitality segment. With the hospitality segment returning to the black in FY22 (pre-tax profit at RM3.2m), we reckon that the revival in tourism activities, particularly from the re-opening of China borders may sustain the positive trend.

• Other segments keeping up. While the IBS segment is expected to remain flattish, we are sanguine on the cables segment that is operating at full steam, driven by strong demand from (i) transitioning into 5G, (ii) mushrooming of data centres following the rising adoption of cloud services, (iii) AI integration and (iv) rapid urbanisation. Moving forward, OSK will be undertaking expansion between 20-25% of current capacity. Meanwhile, the construction segment will be kept busy with an outstanding orderbook of RM460.9m from internal projects.

Valuation & Recommendation

• We continue to favour OSK for their (i) resilient property development segment with a healthy mix of high rise launches and 2 township developments that is supported by in-house construction arm, (ii) growing loan portfolio size under capital financing, (iii) stable income from its 10.2% stake in RHB, (iv) change of fortune in the hospitality segment and (v) strong demand bolstering the cables segment.

• No changes made to our earnings forecast and we maintained our BUY recommendation on OSK with an unchanged target price at RM1.41. Although share price has appreciated and is lingering at the highest level since 2014, we note that prospective dividend yields at 5.9%-6.4% for FY23f-FY25f remains fairly attractive for longer term investment horizon.

• We adopted a sum-of-parts valuation by pegging 0.8x (discount is to reflect their smaller scale business against larger pure-play players) to the financial services and property development book value, while the construction, industries & hospitality segments potential earnings are pegged to P/E multiple of 9.0x.

• 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 - 10 Mar 2023