OSK is a well-diversified conglomerate that has exposure in property, financial services, industries and hospitality. We are forecasting FY22-24 core earnings to grow at a CAGR of 10.2% anchored by strong property launch pipelines, stable loan growth in capital financing, capacity expansion and robust growth in industries as well as NIM expansion in RHB. We initiate coverage on OSK with BUY and a TP of RM1.42 based on 40% discount to SOP-derived value of RM2.37. We believe that OSK with its resilient business model headed by a capable management team should be able to sail through the different economic cycles.

Well-diversified conglomerate. OSK currently has exposure in four core main business segments, namely property (property development and property investment), financial services (capital financing and shareholdings in RHB), industries (cables and IBS) and hospitality (hotels and vacation club).

Vertically-integrated property segment. OSK’s property segment is supported by its construction and building materials segment (IBS manufacturing). This allows the group to (i) have better quality control (evident from consistently high QLASSIC score); (ii) faster time to market that allows the group to have brisk project turnover rate and cash flow; and (iii) mitigate labour shortage risk through its IBS construction method.

Stake in RHB exceeds its market cap. OSK’s 10.22% stake in RHB has a market value of RM2.47bn, which exceeds its market cap (128.3%). The shareholding provides the group with recurring dividend income and allows the group to secure loans (through share pledge) to expand its capital financing business. We believe the significant discount to its RHB’s stake is unjustified, especially given that its other core segments are currently profitable and doing well, suggesting a gross mispricing of the group.

Capital financing gaining traction. The group’s capital financing business capitalizes on the unmet and underserved banking needs. The segment has in recent years grown sizeably, with PBT growing at a 5-year CAGR of 14.8%. The segment is now one of the major contributors to the group’s earnings.

Growing industries segment. Its power cables segment is poised to grow through (i) capacity expansion (+20-25% over the next few years); and (ii) growing power cable demand arising from increase in infra spending. Its IBS segment should benefit from an anticipated structural increase in IBS construction adoption arising from (i) labour shortage and cost increase; and (ii) national policies to reduce foreign labour reliance.

Forecast. We are forecasting FY22-24 core earnings to grow at a CAGR of 10.2%, with estimated FY22/23/24 earnings of RM379.9m/RM422.9m/RM461.2m. Earnings growth are supported by (i) property with strong new launch pipelines; (ii) capital financing from stable loan growth (iii) industries from capacity expansion and demand growth; (iv) hospitality from recovery in foreign tourist arrivals; and (v) RHB from NIM expansion and absence of Prosperity Tax (after FY22).

Initiate BUY, TP: RM1.42. We initiate coverage on OSK under Bursa RISE program with a BUY rating and TP of RM1.42 based on 40% discount to SOP-derived value of RM2.37. We believe our valuation is on the conservative side, as even at our TP, this implies FY22/23/24 P/E multiple of only 7.7x/6.9x/6.3x, which we deem to be undemanding given the group’s stable earnings profile and strong earnings quality. Over the years, through steady and measured steps, OSK has successfully transformed its business from an investment banking firm to a well-diversified conglomerate. We believe that OSK with its resilient business model headed by a capable management team should be able to sail through the different economic cycles.

Source: Hong Leong Investment Bank Research - 8 Dec 2022