OSK Holdings

Recommendation: BUY
Stock Code: 5053 Bloomberg: OSK MK Price: MYR1.34 12-Month Target Price: MYR1.60 Date: June 22, 2010

Board: Main Pr i ce 30 Day Movi ng Aver age Price (MYR)

2.40

Sector: Finance 2.20

2.00

GICS: Financials/Investment Banking & Brokerage 1.80

1.60
Market Value - Total: MYR1,287.4 mln 1.40
1.20

Summary: OSK Holdings (OSKH) has evolved into a niche 1.00

0.80
investment bank with a regional presence from a pure retail 0.60
stockbroker since its flotation in 1991. It offers investment
banking services, equities and futures, private equity and Vol ume Vol ('000)
12,000
fund management services. The stock is a component of the
8,000
FBM 70 and FBM EMAS.
4,000

Analyst: Lorraine Tan, CFA 0

Jun 07 Aug 07 Nov 07 Jan 08 Mar 08 May 08 Aug 08 Oct 08 Dec 08 Feb 09 Apr 09 Jul 09 Sep 09 Nov 09 Jan 10 Apr 10 Jun 10

Highlights Recommendation

 We resume coverage of OSK Holdings (OSK) with a Buy
recommendation and 12-month target price of MYR1.60.
 We expect OSK to post EPS growth of 27.7% YoY in 2011, driven
primarily by stronger stockbroking and investment banking income
contribution in 2011. While 2010 will also see decent earnings growth
of 16.4% YoY, EPS is flat due to dilution from the issuance of new
shares from its recent warrants conversion.
 Fee based income (essentially from its stockbroking, investment
banking and fund management activities) is expected to grow although
the recent rise in volatility coupled with easing stock market velocity
have dampened our original expectations for 2010. We see some
delays in new IPOs but mergers & acquisition activity should continue
to see a pick-up. As such, we see a greater recovery in 2011 for equity
related activities.
Investment Risks
 Risks to our recommendation and target price include a drop in market
turnover on the regional bourses and additional impairment provisions.
These may cause downward revisions in our earnings forecast.
Fiercer-than-assumed competition will result in narrower margins for
the investment banking businesses.
 Our base case expectation is for the global economy to grow albeit at a
sluggish pace over these next two years. We do not expect the current
eurozone debt situation to spread significantly so as to impact the
global financial system. In this regard, we believe Asian financial
markets should see an improving outlook and operating environment.
 With OSK currently trading slightly below its historical average PER at
9.4x 2010 EPS and with 2009-2011 EPS CAGR of 12.6%, we believe
the present share price level remains relatively attractive given OSK’s
current potential. Its 2010 P/BV of 0.8x is higher than the average of its
peers but we feel OSK’s relative larger size should justify a 10%
premium. In addition, the company’s growing and material
geographical diversification of its earnings should be seen as positive.
 Our 12-month target price of MYR1.60 is based on attributing peer
group PER of 11.3x to OSK’s 2010 EPS and P/BV of 0.7x and takes
into account OSK’s own historical averages. At our target price, OSK
would trade on 11.6x 2010 EPS, in line with its peer group.
 OSK’s corporate social responsibility undertaking is through its
commitment to the marketplace, workplace and the community. It aims
to provide comprehensive information about its activities, have a
sustainable business, develop human capital, educate the community
and contribute to various causes and charities.

Key Stock Statistics Per Share Data

FY Dec. 2009 2010E FY Dec. 2007 2008 2009 2010E
Reported EPS (sen) 13.9 13.8 Book Value (MYR) 1.94 2.07 1.78 1.68
PER (x) 9.7 9.7 Cash Flow (sen) 37.3 30.7 22.4 24.5
Dividend/Share (sen) 6.3 6.5 Reported Earnings (sen) 37.0 16.6 13.9 13.8
NTA/Share (MYR) 1.78 1.68 Dividend (sen) 16.7 6.3 6.3 6.5
Book Value/Share (MYR) 1.78 1.68 Payout Ratio (%) 34.1 26.8 32.4 48.0
No. of Outstanding Shares (mln) 960.7 PER (x) 3.6 8.1 9.7 9.7
52-week Share Price Range (MYR) 0.96 - 1.55 P/Cash Flow (x) 3.6 4.4 6.0 5.5
Major Shareholders: % P/Book Value (x) 0.7 0.6 0.8 0.8
Ong Leong Huat @ Wong Joo Hwa 30.1 Dividend Yield (%) 12.4 4.7 4.7 4.9
* Stock not deemed Shariah compliant by the Securities Commission. ROE (%) 20.8 8.4 7.1 8.4
Net Gearing (%) 0.0 0.0 0.0 0.0

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 OSK Holdings
Recommendation: BUY
Stock Code: 5053 Bloomberg: OSK MK Price: MYR1.34 12-Month Target Price: MYR1.60 Date: June 22, 2010

Revenue Breakdown by Country

Businesses
900.0
Given OSK’s start as a stockbroking firm, equity & futures trading activities
and related stockbroking functions remain an integral and significant part 800.0 Others Others
of its overall business. Contributions, however, have broadened in terms
of activity and geography since the company listed in 1991. Stockbroking 700.0 Singapore
Singapore
made up 50% of the company’s 2009 revenue with investment banking
and lending activities together contributing 38%. 600.0

MYR mln
500.0
Malaysian based revenue will still be anchored by its stockbroking
activities. OSK’s market share is expected to be sustained at around 7% 400.0
of trading value and earnings will largely be dependent on the swings in
market values and velocity. Fund management is another core activity, 300.0 Malaysia
Malaysia
making up around 10% of total group revenue, but growth is expected to
be relatively stable in the absence of acquisition-led build up in its AUM. 200.0

The company spun off its property development activities in end-2008 100.0
resulting in a less complicated corporate and financial structure focused
on financial services. As such, 2008 revenue and profit is not entirely -
comparable to 2009’s make-up. Property development contributions made 2008 2009
up 10.5% of 2008 revenue.

Source: Company data

Revenue Breakdown by Activity in 2009

Others

Fund Mgmt
2%
Recent Key Developments
Investment
10%
Banking
28% 1Q10 Results
The recent 1Q10 earnings performance saw an all around YoY jump in
profitability due largely to the low base a year ago and on vastly improved
market conditions which boosted stockbroking activity. On a QoQ basis,
revenue rose 3.1% from 4Q09 level but operating profit fell 4.8% due to a
7.9% rise in operating expenses. As such operating profit margin dipped
to 34.9% from 37.9%. We believe the rise in expenses is generally
seasonal. On the whole, costs remain well contained relative to the YoY
Lending pace in revenue growth. Also, earnings quality improved over 4Q09 with a
activities lower portion of unrealized gains boosting income. Excluding unrealized
Equity & 10% items, operating profit would be MYR56.4 mln reflecting a more than two-
Futures fold increase over both 1Q09 and 4Q09 levels.
50%
With the unrealized gains but excluding provisions, write-backs and write-
offs, profit before tax improved to MYR76.0 mln with the margin expanding
Source: Company data
to 30.9%, its highest level since 2Q08. This is notable given that 2Q08
included property development income. A provision of MYR15.4 mln ate
Geographically, OSK has made in roads into the Singapore investment
into the decent profit leaving net profit at MYR32.2 mln, a seven-fold
banking arena and aims to build up its Hong Kong, Indonesian and
improvement over year-ago profit but down -13.2% QoQ. We believe the
Vietnamese operations similarly. Given this regional expansion,
impairment provision is related largely to two unquoted debt securities.
Malaysia’s share of OSK’s group revenue has fallen to 70% in 2009 from
78% in 2080. Management expects strong growth from its non-Malaysian
In terms of segmental revenue, stockbroking contribution was the key
investment banking activities due in part to the low base but also as the
driver of growth. Gross brokerage fees jumped 137.4% YoY (9.6% QoQ)
group expands its Singapore team. Further expansion should come as the
tracking in part the rise in the Malaysian bourse turnover. Profit-wise,
group looks for an alliance in Thailand and with the commencement of
however, investment banking remains the top contributor making up
banking activity in Cambodia.
63.7% of 1Q10 operating profit.

Capital Changes
A 1:4 bonus issue completed in January 2010 followed by warrants
conversion by March 2010 has raised OSK’s share base to 960.7 mln
from 678.7 mln. The expiry of the Warrant B 2000/2010 resulted in the
issuance of 116.3 mln new shares for MYR117.1 mln cash.

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 OSK Holdings
Recommendation: BUY
Stock Code: 5053 Bloomberg: OSK MK Price: MYR1.34 12-Month Target Price: MYR1.60 Date: June 22, 2010

Earnings Outlook
We expect 2010 net profit to grow 16.4% YoY on the back of an 18.2%
YoY rise in revenue. The improved earnings are driven primarily by a
more conducive market environment with the regional economies and
bourses recovering from 2009’s recession and generally benign interest
rates. While the unfolding eurozone debt crisis is likely to slow global
growth, we do not expect the global economy to slip back into a recession.
However, growth is likely to be sluggish on lackluster developed market
demand given unemployment rates that are expected to remain high
through 2011.
Market trading volumes in 2Q10 are likely, however, to be lower than in
2Q09 in the absence of the strong uptick seen this time last year. Also,
May was challenging for global markets resulting in delays in several high
profile IPOs regionally. In this regard, while OSK has a healthy pipeline of
mandated deals (+50% YoY) and IPOs, we expect some delays to limit
2010 revenue growth. However, it remains possible that should market
sentiment improve in 4Q10, as we suspect, activity could exceed our
assumptions.
On the whole, we see the Malaysian stock market turnover rising 17.0% in
2010. This should fuel OSK’s stockbroking income to grow 20.4% in 2010
making up 51.2% of total 2010 revenue. Investment banking contribution
is expected to keep pace due to expanding regional activity, making up
28.9% of 2010 revenue. Lending and fund management fee growth is
assumed to see relatively slower growth of 12.0% and 10.0%,
respectively, given historically more stable performances.
Revenue by Activity (2009-2011F)
2011 earnings is expected to be stronger, growing 28.9% YoY, driven by
our expectation for equity markets to see greater confidence. A quickening
in interest rate hikes may eat into lending margins but OSK’s bond
portfolio should not be greatly hampered given limited short term holdings.
We continue to expect recovering stockbroking activity to drive revenue.
At this stage, we see market turnover jumping 30% in 2011 on the
improving global economy as well as the wider acceptance of the stock
exchange’s direct market access trading platform. This better sentiment
should also boost investment banking activity, which we expect to
maintain revenue growth of 20%.
Cost-wise, profit margins are expected to taper off in 2011 as expenses
catch up to revenue growth. We also anticipate higher interest expense
with interest rates assumed to rise. This should be offset on the bottomline
by reduced impairment charges.
Valuation
We value OSK based on relative PER and P/BV. We have chosen to
compare OSK to that of other stockbrokers with growing investment
banking activity – namely K&N Kenanga (KNK MK, MYR0.775, Not
Ranked) and Hwang DBS (HDBS MK, MYR1.61, Not Ranked) and ECM
Libra (ECML MK, MYR0.69, Not Ranked). We note that all three are
smaller than OSK and this should accord OSK some premium.
We have also taken into account OSK historical (2002-2009) average
PERs and P/BVs. The company has averaged a year-end closing PER of
9.9x and a high PER of 13.3x. As such, we believe that our 12-month
target price of MYR1.60 is comfortably within OSK’s historical trading
range with an above closing average PER likely to be supported in light of
the improved market conditions.

1,400.0 Peer Comparison (share price as of midday Jun. 18, 2010)

K&N Hwang ECM
1,200.0 OSK Kenanga DBS Libra*
12M ended Dec-09 Dec-09 Jan-10 Jan-10
1,000.0 Stockbroking activities 411.9 128.3 57.5 169.5
Investment banking 233.2 110.2 54.9 N.A.
Lending / Capital Financing 81.6 6.8 28.4 N.A.
MYR mln

800.0
Fund Management 79.2 0.4 28.1 N.A.
Others 14.5 1.3 4.4 -35.6
600.0
Total Revenue 820.4 246.9 173.4 134.0
Share price 1.33 0.80 1.59 0.69
400.0
PBV x 0.9 0.6 0.5 0.6
PER x 7.5 14.8 6.2 12.9
200.0 ROE % 10.0 4.0 8.2 4.6
ROA % 1.7 1.1 1.7 1.9
0.0 *No detailed breakdown available so investment banking activity is also included in stockbroking
income. Eliminations is included into the Others category.
2008 2009 2010F 2011F
Source: Company data
Investment Banking Lending activities
Equity & Futures Fund Mgmt
Others Dividend Payout
Source: Company data, S&P Equity Research OSK does not have a specified dividend payout policy but has paid
dividends since its listing. In the past two years (2008 and 2009), the
While 2010 earnings growth is decent, dilution from the issuance of company paid out 7.5 sen/share (gross). Adjusting for the recent bonus
shares resulting from the conversion of its warrants will result in a slight issue, this would equate to 6.3 sen. We have assumed that OSK will aim
dip in EPS. The other potential risk to earnings will be from additional to maintain its DPS in absolute terms. As such, we may see the payout
impairment provisions on its unquoted debt securities. OSK provided rise to 48% of net profit in 2010 before sliding back to 38% in 2011 with
MYR15.4 mln in 1Q10 and it remains to be seen whether there will be the expanded share base.
additional provisions as the year progresses.

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 OSK Holdings
Recommendation: BUY
Stock Code: 5053 Bloomberg: OSK MK Price: MYR1.34 12-Month Target Price: MYR1.60 Date: June 22, 2010

Profit & Loss

FY Dec. / MYR mln 2008 2009 2010E 2011E
Reported Revenue 812.2 820.4 969.3 1,192.2
Reported Operating Profit 248.7 189.7 235.4 280.2
Depreciation & Amortization -15.0 -15.0 -15.0 -15.0
Net Interest Income / (Expense) 95.7 103.7 131.5 164.8
Reported Pre-tax Profit 168.2 191.0 220.0 283.7
Effective Tax Rate (%) 17.7 28.2 27.0 27.0
Reported Net Profit 134.8 112.6 131.1 169.0
Reported Operating Margin (%) 30.6 23.1 24.3 23.5
Reported Pre-tax Margin (%) 20.7 23.3 22.7 23.8
Reported Net Margin (%) 16.6 13.7 13.5 14.2
Source: Company data, S&P Equity Research

Balance Sheet
FY Dec. / MYR mln 2007 2008 2009

Total Assets 8,114.4 6,138.7 9,887.1

Fixed Assets 163.5 163.0 161.4
Current Assets 6,989.2 5,340.2 9,320.0
Other LT Assets 961.7 635.5 405.8
Current Liabilities 5,751.3 4,141.3 8,027.2
LT Liabilities 74.1 318.0 348.2
Share Capital 672.1 1,380.4 1,287.1
Shareholders' Funds 1,461.0 1,679.4 1,511.7
Source: Company data

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 Required Disclosures

Recommendation and Target Price History P rice (M YR)

Date Recommendation Target Price 2.4
New Buy 1.60
2-Feb-10 Not Ranked 2.2

30-Nov-09 Strong Buy 1.60 2.0

28-Aug-09 Strong Buy 1.44
1-Jun-09 Buy 1.20 1.8
16-Apr-09 Hold 0.97
1.6
3-Mar-09 Hold 0.71
1-Dec-08 Hold 0.75 1.4
4-Sep-08 Hold 1.19
30-May-08 Buy 1.55 1.2

25-Oct-07 Not Ranked

1.0
30-Aug-07 Buy 2.06
26-Jun-07 Strong Buy 2.79 0.8

0.6
Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10

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