OSK’s growth prospects are looking good supported by its (i) property development segment anchored by scale up in launches; and (ii) capital financing mainly from the scale up in growing its Australia and civil financing segments. In addition, the earnings contribution from RHB should also improve in FY23 given the absence of Prosperity Tax, while its elevated CET1 ratio indicates headroom for attractive dividend payout potential. Maintain BUY with an unchanged TP of RM1.42 based on 40% discount to SOP-derived value of RM2.37. Given the positive outlook especially from its property development and capital financing segments, the stock could potentially be re-rated as it gains investors’ focus.
We Recently Met With Management With the Following Key Takeaways:
Property development – Malaysia. In FY22, the group invested RM42.4m to acquire a total of 90 acres lands with an estimated GDV of RM401.2m, translating to an attractive land cost-to-GDV of 10.6%. The acquisitions were for an expansion of its two townships: (i) Iringan Bayu, Seremban (39.2 acres, est. GDV: RM174.5m); and (ii) Sg Petani, Kedah (49.8 acres, est. GDV: RM226.7m).
For FY23, the group is setting a launch target of RM1.3bn for Malaysia (FY22: RM1.1bn). The group is continuing its launch momentum from FY22, which is on the higher end compared to the historical launches in the recent years from Malaysia (RM380m-RM502m from FY17-FY21) (see Figure #1). The higher target launches are backed by the launches from its townships in Seremban and Kedah, which collectively have a GDV of RM603.1m (46.7% of the total launches) (see Figure #2). Both townships have now entered into a sweet spot in their development cycle as the townships now have well-developed infrastructure, facilities and are well populated. Consequently, this allows the group to (i) scale up launches as the mature townships can now attract more demand; and (ii) launch higher value products that have higher margin.
Property development – Australia. In FY22, the group acquired 1.9 acres of land in Melbourne, Australia with an estimated GDV of AUD1.3bn (c.RM3.9bn). The new land is in proximity to its current 5-acre development in MSQ and is strategically located near to Crown Casino and train station (10 min walk) (see Figure #3). The new land has a planned mixed development that includes residential apartments, office, warehouse, restaurants and retail. The group plans to focus on the development in MSQ before moving on to develop this new land likely in 4-5 years’ time. Currently, there is an office building on the land with 67% occupancy rate, which will give the group a recurring stream of income while holding the land. Separately, the group targets to launch Phase 2 of MSQ in Mar 2023 with an estimated GDV of AUD645m (OSK’s effective GDV: AUD262m or c.RM792m) subject to market conditions (see Figure #1). The new phase will consist of a single residential tower with >600 units. The group views that the time is ripe to activate the second phase of MSQ given an anticipated decline in residential property supply in Melbourne for the next two years.
Cumulatively, the target launches from both Malaysia and Australia in FY23 amount to RM2.1bn (+90% YoY).
Capital financing – diversification paid off. The group’s strategy to diversify its capital financing both in terms of product offerings as well as geographically has paid off, allowing the group to sustain the growth momentum in its loan portfolio (see Figure #4). In recent years the group introduced new product offerings including (i) Shariah compliant financing to civil servants; and (ii) micro financing via fintech platform Lyte. In addition, it also ventured in to Australia since Apr 2021. In the absence of the contributions from the new products and Australia, the local conventional financing loan portfolio would have declined in 9M22 vs. FY21. This was because during this period, banks have relaxed their lending requirements, thus, some customers have turned to the banks for loans as they were able to meet their credit assessments.
Capital financing – Australia. While the group had only obtained its moneylending license in Australia not long ago in Apr 2021, this business is scaling up strongly with its loan portfolio at c.RM216m as at 9M22 (+4.2x from c.RM41.2m in FY21), making up 19% of its total loan portfolio. The group sees vast potential in the Australian capital financing market given that it is not as well-banked compared to Malaysia, allowing plenty of room for scaling. Management targets to scale up its Australian loan portfolio to AUD300m (c.RM900m) in the next five years.
Capital financing – Malaysia. In Malaysia, management expects moderate growth in its conventional financing portfolio. For its civil servant financing, the group is ready to scale up growth in this segment after more than two years of fine-tuning the operations. Current loan portfolio in this segment stood at c.RM72m. Management targets to scale this up to RM150m by end-2023. Separately, its micro financing through Lyte is still relatively small. The group plans to explore collaboration opportunities to expand its product offerings in this segment.
Dividend policy. The group does not adopt a formal dividend policy. Management shared that this approach is to ensure stability in its dividend payout as adopting a dividend policy may subject this to volatility given the volatile nature of the earnings from its property development segment. Historically, the group had consistently paid DPS of 5 sen or above, with the exception of 4 sen DPS in FY20 due to Covid. We expect the group will pay DPS of at least 5 sen in FY22.
Outlook. To sum up, we believe the growth prospects of the group are looking good. This is supported by its property development segment anchored by scale up in launches. Furthermore, the gradual easing in labour shortage should expedite the revenue recognition of its unbilled sales (RM1.04bn as at 9M22). For capital financing, we see vast growth potential for its Australia and civil financing segments, while its conventional financing should also show steady improvement. Finally, the earnings contribution from RHB should also improve in FY23 given the absence of Prosperity Tax, while its elevated CET1 ratio indicates headroom for attractive dividend payout potential.
Forecasts. Unchanged.
Maintain BUY with an unchanged 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 PER of merely 7.7x/6.9x/6.3x, which we deem to be undemanding given the group’s stable earnings profile and strong earnings quality. The stock is currently deep in value, with its current market cap below the value of its stake in RHB. Given the positive outlook especially from its property development and capital financing segments, the stock could potentially be re-rated as it gains investors’ focus.
Source: Hong Leong Investment Bank Research - 16 Jan 2023
