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Why Is OSK Still Cheap After A 35% YTD Gain?
By: Choo Hao Xiang
Articles (151) Profile

Financial services provider OSK Holdings (OSKH) has had a good run this year. Year-to-date, its share price has shot up by more than 30 percent, dwarfing the local market benchmark’s 0.3 percent gain.

The share price performance was also in contrast to OSKH’s listless showing for the past two years. This could be attributed to the absence of a core operating business segment following the divestiture of its mainstay investment banking business in November 2012.

Entering into the second half of the year, OSKH landed on investors’ radar when news that a mega merger comprising RHB Capital which OSKH has a 9.9 percent stake in, CIMB, and Malaysia Building Society (MBS) was in the making were made known.

To add to the excitement, OSKH’s managing director Tan Sri Ong Leong Huat shared a new vision he had for the company.

Company Background
With a history that goes all the way back to 1963, OSKH started out as a domestic retail stockbroking firm. It gradually climbed up the ladder to become one of the leading investment bankers in the region. In 2012, the group disposed of its investment banking unit for a stake in RHB.

At present, OSKH has two business lines. It has a capital funding arm named OSK Capital. OSK Capital’s principal activity is the provision of equity financing and other investment related financing to both retail individuals and corporate clients.

The second business segment is the management and letting of properties. The company carries out property investment and development activities under OSK Realty and receives rental income from investment properties held under Ke-Zan Holdings.

Besides these businesses, what is largely driving the company’s profitability is its equity accounted profits from its investment in RHB Capital.

For the fiscal year ended 31 December 2013, share of profit from RHB contributed about three-quarters of OSKH’s profit before tax of RM213.2 million.

RHB Stake To Turn More Valuable
The RHB, CIMB, MBS merger proposal came into light in July.

The three parties had proposed to create an enlarged Islamic banking franchise, in line with Bank Negara’s financial sector blueprint to build larger and more efficient Malaysian financial institutions that are better capable of competing in the wider region.

Talks are expected to be completed in the first three months of 2015.

According to Fitch Ratings, a successful transaction will produce an Asean bank in the top five league, which would be in a better position to grow regionally with the larger scale of its domestic operations.

The merger priced RHB at a price to book value of 1.4 times as at 30 June, based on the filings with Bursa Malaysia. Given RHB currently trades at about 1.2 times price to book value, the banking merger would likely translate to a more valuable investment for OSKH’s 9.9 percent equity interest post-merger.

This, in turn, benefits shareholders regardless of OSKH’s next move – to dispose its stake and utilise its proceeds or retains its crown jewel as an investment. Should it remain on OSKH’s books, it will continue to power the company’s earnings.

If the stake is disposed of, this will give OSKH plenty of headroom to venture into alternative new businesses.

Beginning Of A New Chapter?
A first-tier property group. That is OSKH’s new vision. The financial services provider is planning to embark on this new journey to add a new source of income.

To attain its goal, OSKH has proposed to acquire stakes in two medium-sized real estate developers in a deal worth up to RM1.2 billion.

The merger exercise involving OSKH, OSK Property Holdings and PJ Development Holdings will transform OSKH into a real estate developer that is on the same footing with the big boys such as IGB Corporation, Mah Sing Group and UOA Development.

OSKH will also gain exposure to different markets. This diversification will come from PJ Development Holdings which is engaged in the manufacturing and trading of cables as well as leisure business.

Below-Book Stock
Based on the closing price of RM2.23 on 28 November, OSKH is trading at a discount of its book value at 0.8 times.

This essentially means that after deducting total liabilities from total assets, the sum is larger than the company’s market capitalisation.

The company has also been paying out dividends regularly on the back of maintained profitability for the past decade. Barring the financial year ended 31 December 2012 where the company recorded RM857.7 million in disposal gain, the company has been paying out at least 37 percent of its earnings.

Analysts’ View
Analysts are generally positive on OSKH. Public Investment Bank rated OSKH a “Trading Buy”. Under its base-case, the research house valued OSKH at RM2.69 based on the current value of its stake in RHB at RM2.27 and land market value of RM0.42 for its plots of prime land in Jalan Ampang.

Hong Leong Investment Bank (HLIB) views OSKH as a cheaper proxy to RHB. The brokerage estimated that based on HLIB’s target price of RM10.00 for RHB, OSKH could be valued at RM2.63.

Having said that, investors should take note that the above-mentioned developments are still in discussion stages. Should the deals fall through, it would be back to square one for OSKH.

This article is brought to you by Bursa Malaysia Berhad. The research in this article was conducted independently by Pioneers & Leaders (Publishers) Pte Ltd (“Pioneers & Leaders”) and the views and opinions expressed in this article are Pioneers & Leaders’ own and do not represent the views and opinions of Bursa Malaysia. Bursa Malaysia does not warrant or represent, expressly or impliedly as to the accuracy, completeness and currency of the information in this article. In no event shall Bursa Malaysia be liable to the reader or any other third party for any claim howsoever arising out of or in relation to this article.
Haoxiang manages and oversees the portfolio of stocks in the consumer goods and hospitality sectors at Shares Investment.

Please click here for more information about this author.


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