Stronger second half forecast for OSK

PETALING JAYA: OSK Holdings Bhd’s financial performance is set to improve in the second half of the year (2H23) helped by its growing capital-financing business.

Hong Leong Investment Bank (HLIB) Research noted the group’s financing business is gaining traction among civil servants in Malaysia and in Australia with both segments now accounting for 11% and 17%, respectively, of OSK’s total loan portfolio as of June 30.

OSK successfully obtained approval that will enable it to disburse loans directly to civil servants in Peninsular Malaysia in March, further widening its presence geographically. The company has a working relationship with Petronesa Sdn Bhd to provide similar services to civil servants in Sabah and Sarawak.

“With the licence, the group now has an extra lever that allows it to expand at an ever faster pace. As of end-June, OSK had around 7,000 accounts under the segment. As Malaysia has a very large base of more than 1.7 million civil servants, there is a vast addressable market for the service,” HLIB Research stated in a report after meeting with OSK management.

The research house believes OSK has a competitive edge over its peers given its strong balance sheet and established treasury team which allows the group to secure lower cost of funds and have a higher capacity for loan disbursement.

It added OSK’s capital financing business in Australia, which grew 36.5% quarter-on-quarter (q-o-q) to RM253mil in the second quarter (2Q23), is scaling up its lending which should lead to improved margins as its operating leverage improves.

The capital financing business made RM39.6mil in pre-tax profit in 1H23.

OSK’s property development business is also anticipated to perform better in 2H23 after making a pre-tax profit of RM33.2mil for the 2Q23 (up 26.9% q-o-q), which took its 1H23 sum to RM59.4mil, which was down 10.8% year-on-year (y-o-y).

“In 2H23, we anticipate domestic sales to improve on the back of more launches while earnings should improve as some projects enter into more advanced stage of construction,” HLIB Research noted.

The segment had a slow 1H23 due to lower domestic sales as a result of fewer launches and delays in regulatory approvals and lower progress billings on projects in early stages of construction.

OSK’s industries segment was also set to enjoy an up cycle in 2H23 as both the the cables and integrated building systems (IBS) segments continue to see improvements in orders.

The group’s industries segment recorded a 2Q23 pre-tax profit of RM12.8mil (up 100% q-o-q and 138% y-o-y) which took its 1H23 sum to RM19.2mil (up 82.2% y-o-y).

The segment is entering into a new up cycle in earnings and should record an even stronger 2H23 as both cables and IBS segments continue to see wider adoption.

HLIB Research thus maintained its “buy” call on OSK but with a higher target price (TP) of RM1.73 a share (from RM1.61), based on a lower 30% discount to its sum-of-parts derived value of RM2.47 a share.

“Our TP implies financial year 2023, 2024 and 2025 price to earnings multiples of 7.8, 7.4, 7.1 times, respectively. We believe the stock should gain increasing interest given its business segments, especially capital financing and industries, are demonstrating strong growth and should play a bigger role in contributing to the group’s earnings moving forward,” it stated.

The research house added the stock also currently provides a projected 5.8% dividend yield for FY23.