On Our Radar - OSK - Cheap entry into RHBCAP

INVESTMENT MERIT

- To recap, RHBCAP acquired OSKIB for a total consideration of RM2.0b via a combination of: 1) RM1.8b in the form of 245.0m new RHBCAP shares (or issued at RM7.36/share) and 2) RM147.5m in cash. The acquisition cost worked out to a historical PBV of 1.8x and PERof 18.9x. Post-acquisition, OSK owns a 9.9% stake in RHBCAP.

- Great value in OSK Holding.  There is currently a wide gap between OSK’s total market capitalisation of RM1.4b and OSK’s 9.9% stake in RHBCAP, which is worth RM1.9b based on the latter’s current market capitalisation. This makes OSK a cheaper proxy for entry into RHBCAP, which is itself already a laggard among the banking stocks.  Our sensitivity analysis shows that every 50.0 sen increase in RHBCAP’s share price will raise OSK’s RNAV by 12.0 sen.   

- To benefit from the merger synergies. In addition to that, we view the merger as a positive move for OSK where it will benefit from its equity interest in RHBCAP, which is backed by a  strong commercial banking and an enlarged investment banking arm, in deriving top-line synegies.  The group would now also be able to leverage on RHBCAP’s strong balance sheet position for growth. Together with the proceeds from the merger and its smaller capital expenditure requirements going forward, we estimate that OSK should be able to increase its dividend payout ratio to 60%-70% of its net earnings.

- SOP valuation with a fair value of RM1.83. Taking into consideration all of the above, we believe the fair value for OSK is RM1.83. This is derived from applying a 25.0% holding company discount to our SOP-based fair value of RM2.44.  Hence we see great value in the stock ahead.

SWOT ANALYSIS

- Strengths: Strong balance sheet from its stake in RHBCAP

- Weakness:  Lack of clear business direction after selling off OSKIB

- Opportunity: Venture into new business opportunities with the cash pile arising from the merger

- Threats: Tighter lending rules and a margin squeeze.

TECHNICALS

- Resistance: RM1.53 (R1), RM1.65 (R2)

- Support: RM1.44 (S1), RM1.38 (S2)

- Comments:  OSK has formed a bullish “Megaphone” pattern on the daily chart. The overall uptrend remains intact and the indicators suggest that the share price may rebound from here. Traders may consider buying in now, with immediate  technical targets of RM1.53, and possibly RM1.65 next. 

BUSINESS OVERVIEW

OSK was established in 1963 as a small stockbroking house. It was listed on the KLSE Main Board in 1991 and obtained  its universal broker status in 2002. It ventured into investment bank in 2007. It has also widened its network with presence now in six countries in the Asia region. On 28 May 2012, OSK announced a merger between OSK Investment Bank and RHB Capital Berhad. The company is also involved in investment holding activites, property  investment and capital financing.

CORE BUSINESS SEGMENTS

- RHB Capital. OSK and RHB Capital had entered into a conditional agreement to merge their investment banking operations on 28 May 2012. This will transform the merged entity into the largest investment bank by assets. The deal makes OSK the 3^rd  largest shareholder in RHB Captial with a 9.9% stake. 

- Capital Financing. Its 100%-owned subsidiary, OSK Capital Sdn Bhd is a licensed moneylender that provides share financing and other investment financing to retail and corporate clients.

- Property Investments.  OSK is involved in property investment through Ke-Zan Holdings Bhd and OSK Realty Sdn Bhd. Ke Zan Holdings is a wholly subsidiary of OSK Holdings with its principal business in investment holdings and the letting of  commercial properties. OSK Realty Sdn Bhd meanwhile, is involved in property investments. 

Source: Kenanga