Summary

• OSK Holdings Bhd’s (OSK) 1QFY23 net profit climbed 36.3% YoY to RM115.1m, driven by higher contribution from the property development and hospitality  segments. Revenue for the quarter rose 8.7% YoY to RM333.2m.

• The reported numbers came in line; making up to 23.8% of our forecasted net profit  of RM484.1m and 26.4% of consensus forecast of RM436.0m. We reckon that the  earnings growth in the subsequent quarters will be supported by (i) progressive  billings of unbilled property sales (ii) steady income from capital financing and (iii)  strategic investment in RHB Bank Bhd (10.24% equity stake).

• OSK’s property development unbilled sales of approximately RM1.02bn will sustain  earnings visibility over the next 18-24 months. Looking ahead, there are 4 projects  with a total combined GDV of RM714.0m in the pipeline to be launched in 2H23,  while phase 2 of Melbourne Square (MSQ) comprising 600 units of high-rise  apartment with a total GDV of AUD650.0m was soft launched in April 2023.

• We reckon that OSK’s 2,002-ac of landbank (as at end-1Q23) with an estimated  gross development value (GDV) of RM16.20bn should ensure earnings sustainability over the long run. The group remains active in the lookout for potential land acquisitions adjacent to their existing 2 townships.

• In 1QFY23, we gather that the loan portfolio stood at RM1.32bn with minimal non-performing loan ratio and backed by adequate security cover. Growth is expected  to sustain following the launches of new products offerings and participating in  fintech platform to widen its coverage.

• The construction segment will be anchored by an outstanding orderbook of  RM415.1m to be recognised progressively. While the property investment segment  demonstrated stability in occupancy rate, the industries segment will be kept busy,  operating at close to full capacity with planned production expansion on the cards.

• We foresee that the recovery in tourism activities may continue to lend support to  the hospitality segment. Domestic travelers led the recovery trend in 2022 and the  re-opening of international borders in China may boost the tourism activities from  2023 onwards. With flight frequencies ramping up, Malaysia is targeting 16.1m  international tourists in 2023.

Valuation & Recommendation

• Given that the reported earnings came in within expectations, we made no changes  to our forecast. We re-iterate 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 - 29 May 2023