Harimau Capital

OSK confident of double-digit growth By LOONG TSE MIN
Friday April 18, 2008 The Star

KUALA LUMPUR: OSK Holdings Bhd sees double-digit revenue and earnings growth in the current financial year (FY08) despite the weak global and domestic stock markets, group managing director Ong Leong Huat said. The growth would largely come from the company’s overseas investment banking operations, he said, adding that the forecast for FY08 took into consideration a possible slowdown in the US economy. “Our expectation is that we can grow the business, especially with our new markets. “Our investment banking operations are about a year old in Singapore and less than a year in Hong Kong, but these are growing very fast. The China set-up is also at its early stage but we are beginning to see the deal flows coming in,” Ong said after the company AGM yesterday.
For the year ended Dec 31, 2007 (FY07), the group reported a 115% growth in revenue to RM1.18bil and a 154% jump in net profit to RM253mil. OSK’s overseas operations contributed 22% to pre-tax profit in FY07, Ong said, adding that this was expected to reach 40% within three years. He said the credit crunch currently experienced by some large multinational investment banks had left a gap for smaller players such as OSK to fill. The group, he added, was finalising the details on its Indonesian investment banking business with a partner and expected the deal to be concluded by the end of the second quarter. He also expects revenue to begin flowing in by year-end. The Indonesian business, together with two other markets in Asean that OSK plans to venture into this year, are expected to cost a total investment of RM180mil to RM200mil, or 20% of shareholders’ funds. Ong said OSK spent 15% to 16% of shareholders’ funds, or RM350mil, when it ventured into the Singapore, China and Hong Kong markets.
The group’s property division, 60% owned-OSK Property Holdings Bhd, which also held its AGM yesterday, contributed about 4.1%, or RM16.7mil, to group pre-tax profit in FY07. The company, chief operating officer Gerard Tan Boon Chuan said, expected revenue and earnings to grow this year despite rising raw material costs. He said rising raw material costs had pushed quotations from contractors up about 15% in the past three to six months, but due to the quick start-up of OSK Property’s existing projects, the costs had been captured in the contracts. However, the higher costs would mean that going forward the developer would have to adjust “selling prices and rate of launches”. “In locations that can support it we may have to raise prices by about 5% to 10%; in others we may have to hold off on future phases,” Tan said. OSK Property currently has an undeveloped land bank of about 2,000 acres with an estimated gross development value of RM4bil to RM5bil over the next five years.
OSK Ventures International Bhd (OSKVI), a 66% subsidiary of OSK Holdings, also held its AGM yesterday. Ong, also an OSKVI director, expects the performance of the venture capital firm to be slow in the first half as it was dependent on the performance of the shares of its associates. He said OSKVI would be defensive in the first half but invest should good opportunities arose. The company is currently reviewing five business ventures for which investments could be made before the fourth quarter. OSKVI contributed about 8%, or RM32.7mil, of group pre-tax profit for FY07.



2007 FY Chairman Statement and Business Review


1. Highlight
OSK officially commenced their business as an investment bank on 29 January 2007.

2. Financial Performance
In 2007, the Group achieved record profits since its listing on Bursa Malaysia Securities Berhad in 1991. While OSK Investment Bank Berhad re07,mained the main contributor to the Group’s performance in 20 the strong performance was broad-based as all business segments contributed significantly to its profitability.

The Group attained revenues of RM1.18 billion with pre-tax profit of RM404.96 million and profit after tax (before minority interests) of RM300.11 million in 2007. The Group recorded strong growth in all segments of our business, from regional equities and futures to investment banking, private equity and fund management. Revenue for financial year 2007 was more than double that of 2006, while pre-tax profit rose two and a half times, as the Group achieved profit after tax (after minority interests) of RM253.08 million. This translates to earnings per share of 39.51 sen, up 141% from 16.35 sen in 2006. The Group’s net assets position improved to RM2.25 per share as at 31 December 2007, up 12% from RM2.01 per share a year ago.

The Group’s regional equities and futures business in Malaysia, Singapore and Hong Kong was the main contributor, making up 50% of Group’s pre-tax profit. This is made up of 28% of pre-tax profit contribution from the Malaysian equities and futures business and 22% from the Hong Kong and Singapore business.

The Group’s investment banking business accounted for 29% of pre-tax profit, with significant contributions from the derivatives business, treasury, debt capital markets and corporate finance. The private equity business accounted for 8% of pre-tax profit while equity financing and fund management contributed to 5% and 4% of pre-tax profit respectively. The remaining 4% of pre-tax profit was from the properties business.

The strong results were partly due to the strong performance of the regional equity markets in Hong Kong, Singapore and Malaysia, but a large part of the growth in pre-tax profit also came from the relatively new businesses under the investment banking division. As the Group had established many new lines of businesses on top of our traditional Malaysian stockbroking business over the last few years, the Group was able to take advantage of the buoyant capital markets to grow the investment banking business significantly and rapidly.

The strong performance from the equities and futures, investment banking, private equity and fund management shows a good mix and balance in terms of revenue and profit contribution to the Group. Also, the Group is diversified in terms of geographical presence, thus reducing reliance on one single market and country. This development augurs well for the future growth and sustainability of revenue and profit for the Group going forward.

In 2007, the Group continued to expand its range of services. In Singapore and Hong Kong, we commenced investment banking business with the establishment of our corporate finance practices. We are now licensed to provide the entire spectrum of corporate finance and advisory services in these two countries and we presently have a total of 10 people in our Singapore corporate finance outfit and 6 in Hong Kong. These new investment banking activities will complement our existing equities and futures business in these markets and provide us with the opportunity to undertake more cross-border transactions in the region.

3. Prospects for 2008
The regional capital markets have started to slow down in the fourth quarter of 2007 as a result of the concerns surrounding the United States and European markets. The expectations of a recession in the United States, further subprime-related write-downs by global banks and the inflationary environment driven by record crude oil and other commodity prices have collectively caused uncertainty in the global capital markets.
Against such a backdrop, the Group expects the first half of 2008 to be a challenging period for the capital markets in which we operate. Trading volumes may be lower, and capital market activities may slow down further. However, the OSK Group remains fundamentally strong with healthy financials and a prudent management approach. Further, OSK is operating in markets with strong fundamentals and we expect the Group to resume its growth after this period of uncertainty is over.
While the equities and futures business still relies heavily on the volume of trading in the regional markets, the Group’s other businesses will help to buffer any slowdown in trading volume. The pipeline of mandates in the Malaysian corporate finance and debt capital markets business is strong, the treasury business with the introduction of an Islamic Window in the second quarter of 2008 has plenty of room to grow and the Derivatives business looks set to record another year of strong results. Furthermore, we expect maiden contributions from the Singapore and Hong Kong investment banking businesses to strengthen the Group’ s performance in 2008. The Group is expected to remain competitive in the marketplace and perform well in 2008 despite the challenges and uncertainty in the global market. In 2008, the Group will continue with the expansion of our presence in the region, especially in the ASEAN countries. We will pursue joint ventures and acquisitions, but only when they match our strategies and transition well into our existing business operations. Such joint ventures or acquisitions must expand our market share, enable us to serve our clients better and ultimately create value to our shareholders.