Well-diversified OSK can manage a rough day at sea

OSK with its resilient business model and capable management team should be able to sail through the different economic cycles 

WELL-DIVERSIFIED OSK Holdings Bhd is reckoned to be a company that can sail the rough seas. So says a bank-backed equity research house. 

“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 and a capable management team should be able to sail through the different economic cycles,” said Hong Leong Investment Bank Bhd (HLIB Research) in an initiating coverage note released last week. 

With that in mind, the research house has given the stock listed on the main market of Bursa Malaysia a ‘Buy’, with a target price of RM1.42, based on 40% discount to sum-of-parts (SoP) derived value of RM2.37. For the past 52-week, the average stock price has been 90 sen. 

Background 

OSK began operations in 1963 as a small stockbroking company, which grew into a regional investment bank. In 1982, Tan Sri Ong Leong Huat and his business associates acquired the company for RM2 million. It was listed on the Kuala Lumpur Stock Exchange (KLSE), now known as Bursa Securities, in 1991. Ong is the group’s executive chairman. 

In 1997, OSK Holdings diversified into properties through its subsidiary, OSK Property Holdings Bhd, which was listed in 2002. OSK Property developed residential, township and commercial projects located in strategic growth areas across the country. As OSK Investment Bank Bhd became a Bank Negara Malaysia-regulated entity in 2007, OSK Property was divested from the group due to regulatory requirements. In recent years, the company has grown aggressively in the Klang Valley through a successful integrated pocket development strategy. 

In May 2012, OSK announced the merger of OSK Investment Bank with RHB Investment Bank. In November 2012, OSK completed the disposal of its subsidiary companies and became a major shareholder of RHB Bank Bhd, an investment holding position that OSK continues to hold until today. 

OSK then embarked on a corporate exercise in 2014 to merge PJD Holdings and OSK Property into the group. Following the completion of the corporate exercise with PJD and OSK Property in 2015, OSK transformed into a conglomerate with diversified business interests in five areas: Property, construction, financial services, industries and hospitality. 

Latest Quarter 

For the third quarter ended Dec 31, 2022 (3Q22), OSK posted a net profit of RM113.37 million, up 42% from the same period a year ago on the back of RM347.07 million in revenue, also up 58% from the year before. For the nine months from April to December 2022, the company posted a net profit of RM305.87 million which was marginally higher than the year before on a turnover of RM988.19, up 22% from the year before. 

In 3Q22, OSK said all its business segments have shown improved performance led by the property segment and financial services division. “We wish to highlight that the hotels and resorts division under hospitality segment has rebounded to report a pre-tax profit position compared to a loss position in previous years,” it said in an exchange filing. 

Moving forward, it said its property development division will continue to be supported by the recognition of revenue from progress billings of those properties sold from ongoing projects, including YouCity III, Mira and various phases in its township, 

Iringan Bayu, Negri Sembilan, and Bandar Puteri Jaya, Kedah. It added that these projects will provide a sustainable revenue stream for the division for the remainder of the year and in the near future. 

In Australia, it said it will focus on selling the balance of the completed residential units in Melbourne Square (MSQ). Plans were carried out on the subsequent phases of MSQ and will be ready to be launched if the market condition permits to create a consistent flow of activities. 

As at Sept 30, 2022, the group’s effective unbilled sales stood at RM1 billion with minimal unsold completed stocks. It said the group has a landbank measured at 1,931 acres (781.45ha) with an estimated effective gross development value (GDV) of RM13.7 billion that are strategically located in the Klang Valley; Sungai Petani, Kedah; Butterworth, Penang; Kuantan, Pahang; Seremban, Negri Sembilan; and Melbourne. 

It noted that the property development division will remain one of the key contributors to the performance of the group for the remaining financial year 2022 (FY22). 

Commenting on OSK’s vertically-integrated property segment, HLIB Research said OSK’s property segment is supported by its construction and building materials segment (integrated building systems [IBS] manufacturing). This allows the group to have better quality control and faster time to market that allows the group to have brisk project turnover rate and cashflow. It also mitigates labour shortage risk through its IBS construction method. 

Resilient Business 

Commenting on OSK’s “all-weather business model”, HLIB Research said while the company is doing well in all the segments, investors are more likely to apply a conglomerate discount when valuing the company. This is due to the different segments being perceived as either non-synergistic due to their vastly different business nature or competing for the group’s resources. 

“Nonetheless, we believe that this perception is not entirely true. In fact, there are close links between the different segments,” it said. 

It noted that OSK’s property development segment is well integrated with its construction and building materials segment. It also said that the dividend income from RHB Bank can be used to fund land acquisition and dividend payout to OSK shareholders, while the shares in RHB Bank can be used as pledge to secure borrowing to fund its capital financing and property development businesses. 

“When the business is viewed in its entirety, it is an incredibly solid and resilient business. We believe its earnings track record and stable earnings profile speak for itself and serve as a testament to this view,” it said. TMR 


  • This article first appeared in The Malaysian Reserve weekly print edition