This article first appeared in The Edge Malaysia Weekly on September 16, 2024 - September 22, 2024

The property market has been hit on multiple fronts, from the increased prices of materials and wages to higher borrowing costs, which also affected homebuyers’ ability to purchase houses around the world.

Although classified by the stock exchange under the property sector, OSK Holdings Bhd (KL:OSK) has four other core business segments besides property — construction, hospitality, industries as well as financial services and investment holding — which helped support its earnings over the last few years. In fact, the group’s financial services and investment holding segment contributed the majority of the group’s profit after tax in the last three financial years. OSK Holdings owns a 10.27% strategic equity investment in RHB Bank Bhd.

During The Edge Billion Ringgit Club awards evaluation period, OSK Holdings’ return on equity (ROE) stayed consistently above 7% amid challenges — at 7.4% (in FY2021), 7.6% (FY2022) and 7.9% (FY2023) — resulting in a three-year compound annual growth rate (CAGR) ROE of 7.7%.

As such, the property developer with a growing foothold in the private credit space has bagged this year’s award for the Highest Return on Equity over Three Years among companies in the property sector with a market capitalisation above RM3 billion.

For the financial year 2023, OSK Holdings’ financial services and investment holding segment contributed to the bulk of the group’s profit after tax at RM340.67 million, or about 70% of its total net profit of RM467 million. In FY2022, the same segment contributed RM296.62 million (equivalent to 69% of total net profit of RM424.2 million) and RM278.82 million (amounting to 70% of total net profit of RM398.2 million in FY2021).

On the other hand, net profit from the property development segment has remained the second-largest contributor to the group’s earnings, although the amount has been declining over the last three financial years.

The property development segment contributed profit after tax of RM95.34 million in FY2023, RM118.39 million in FY2022 and RM136.09 million in FY2021 to total group profits.

From a group perspective, OSK Holdings’ net profit grew during the years in review, giving it a three-year CAGR of 13.4% between FY2020 and FY2023.

For the second quarter ended June 30, 2024, OSK Holdings recorded a net profit amounting to RM128.71 million against revenue of RM368.42 million, where net profit was slightly lower by 1.7% and revenue dipped 7.3% from a year earlier. The financial services and investment holding segment contributed the bulk of the pre-tax profit, amounting to RM252.45 million and RM73.021 million respectively, while property development pre-tax profits totalled RM36.63 million for the quarter.

In a research reported dated Aug 28, Hong Leong Investment Bank (HLIB) Research said that OSK Holdings’ earnings had come within expectation, making up 50.3% of its full-year forecast.

HLIB Research said that the group remains on track to see solid growth in FY2024 as it is anticipating a strong 2HFY2024 supported by the property development, cables and capital financing segments.

It added that several of its newer projects in the property development segment should be entering a more advanced stage of construction in the second half of 2024, which should translate into higher billings. As for its cables business, the deliveries of delayed orders from data centres and utility companies should also improve in 2HFY2024.

HLIB Research also anticipates the civil servant and Australia segment loan portfolio of its capital financing business to continue to see healthy growth.

“For FY2025, civil servant financing should be further bolstered by the impending pay hike which raises loan eligibility for civil servants allowing for higher borrowing,” it said.

It also believes that its investment in RHB should see improving capital market demand as Malaysia enters a new investment cycle, on account of the voluminous foreign direct investment and expanding domestic investments.

HLIB Research has maintained its “buy” call on OSK Holdings and increased the target price to RM2.47 from RM2.37 previously.

“Our target price remains conservative as it implies an undemanding FY24/25/26 price-earnings ratio of 10.2/9.6/9.1 times,” it said.

The research house opined that OSK Holdings is an emerging player in the private credit market, with the segment recording a five-year PBT CAGR of 25.9%.

“Investors who take heed of this development could gain early exposure by investing in the stock as the segment is set to gain higher visibility in the future. Besides, the stock also provides exposure to the growing data centre and solar sector via its cables segment,” it added.

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