OSK’s bold game changer

A mini conglomerate is on the way, but first Ong has to convince shareholders

When the buyout deals of OSK Property Holdings Bhd and PJ Development Holdings Bhd (PJD) were announced last October, it left minority shareholders befuddled.

While the announcement confirmed OSK Holdings Bhd’s grand plans of creating a mega property company, the offer prices for OSK Prop and PJD shares were 11.9% and 10.1% below what they were trading at.

The buyout price for PJD shares was also at a significant 37% discount to its net asset value per share.

The proposed buyout, in which minorities are being offered shares in OSK Holdings or a cash option, naturally sent the shares of OSK Prop and PJD falling, after a notable run-up just weeks before.

The merger exercise is still on-going, with the offer document having been sent to shareholders on Aug 10. The independent advice circular would soon be posted to shareholders, who have until Sept 1 to decide if they are accepting.

Investors had been attracted to OSK Prop and PJD prior to the buyout, taking a bet that a corporate exercise would ensue. It did, but just not at the price that investors had expected.

But in an exclusive interview with StarBizWeek, OSK Holdings CEO and group managing director Tan Sri Ong Leong Huat sheds his view on why this deal is iconic and a game changer for OSK.

“In today’s world size does matter. We must grow big in order to create a company that can be resilient, sustainable, competitive, efficient, and able to attract talent.”

The mega property company that is to come out of this merger does have some interesting features. It would have an asset size of RM6bil, shareholders’ funds of RM4.9bil, a recurring net income of some RM386mil, which is expected to grow to RM410mil in FY2015.

In comparison, OSK Prop has shareholders’ funds of RM510.55mil and made a profit of just over RM100mil last year.

It is also true that larger property companies tend to trade at higher values.

Attributing a price earnings (PE) multiple of seven times for the merged entity, and using the projected net income of RM410mil, the new OSK Holdings could have a market cap of around RM3bil, which is four times larger that PJD and more than six times that of OSK Prop.

Ong, a seasoned stockbroker and savvy investor, shares his view on the property market and the importance of the three company merger.

“We have just come off a super cycle where it was conducive for developers to grow their businesses aggressively because of the strong demand for properties and the ease of obtaining loans from banks,” he says.

Ong adds that as the cycle turns, it will become increasingly difficult to grow unless the company has a strong balance sheet to support development activities.

This is because developers will need to fund construction activities with internal resources and be prepared to hold on to finished stocks for a longer period of time, he says.

Ong says another way to explain the proposed merger is that it is a “returning of OSK Prop to its holding company”.

He recalls that due to OSK Holdings gaining an investment banking licence years ago, the company had to spin off its property arm.

And with OSK Holdings having recently sold its investment banking business to RHB Capital Bhd, the merger seems like a logical next step.

In PJD’s case, Ong had been a passive shareholder in the company that was started by relatives. However, since November, he had raised his stake to 21.31% and was appointed to the board on Dec 23, 2013, a clear indication that he was about to play a bigger role.

The proposed merger exercise is a clear indication that PJD will now come under the fold of Ong and the OSK empire.

Another advantage of the mega merger is that it would create more liquidity in OSK Holdings shares and thereby attract more investors, especially institutional ones, points out Ong.

If the mega OSK merger materialises, the merged OSK Holdings Bhd will have four business segments that will classify it as a mini conglomerate, ensuring the group of a diverse income base.

Its four pillars of business will be: property development and investment and construction; hotels; manufacturing building materials and power cables and financial services.

For its earnings breakdown, 40% would come from property, another 40% from financial services (from its RHB Cap stake and a money lending business) and 20% from hotels and buildings materials.

As a combined entity, OSK Holdings would have a total gross development value of RM13.3bil.

It will have landbank of 1,297 acres in Malaysia and five acres in Melbourne, Australia. The company has about RM1.5bil in unbilled sales that will provide a steady pipeline of revenue growth. It also has new projects coming onstream.

Is it a fair deal?

While the “going big” rationale does hold water, disgruntled minorities of OSK Prop and PJD still question why the offer valued their shares so lowly.

An analyst notes that on face value terms, both OSK Prop and PJD shareholders are being shortchanged.

“For OSK Prop, there’s about RM170mil in cash. That in itself is slightly undervaluing the business there. The cash per share is 70 sen hence OSK Holdings is effectively buying the business for RM1.30 per share. Also, the debt at OSK Prop is self-funding because it is attached to investment properties,” the analyst says.

The analyst says that for PJD, the offer is at an even bigger discount.

However, the analyst adds that both OSK Prop and PJD shareholders have to consider current market circumstances when deciding on the deal.

“In this kind of market situation, it might be good to cash out, the analyst says. He adds, “Although the asset value for PJD is high, it will continue just being asset value unless something is done about it. They haven’t been doing a lot to realise it. So shareholders have to look at the bigger picture. Combining the three companies would entail maximising management and running it more effectively. Also the danger is, if it doesn’t go through, the shares may just drift and drag,” the analyst says.

Ong, however, has an interesting response to any suggestion about minorities being short-changed.

“We are swapping discounted shares in OSK Holdings for discounted shares in OSK Prop and PJD,” he says. In other words, the discounted value of OSK Holdings’ shares, negates the discount at which the deal values OSK Prop and PJD, at least according to Ong.

But why does Ong think OSK Holdings shares are undervalued?

At its current price of RM1.67 per share, OSK Holdings is trading at a massive 41% discount to its book value. It also trades at an undemanding historical price earnings multiple 7.6 times.

“If you look at the assets we (OSK Holdings) have, the RHB stake, the buildings, the land, we are trading at a steep discount.”

Crucially, OSK Holdings sits on a valuable 9.97% stake in RHB Capital Bhd (RHB Cap), which in turn is one of the lowest valued banks on Bursa Malasyia, with a price earnings multiple of 8.72 times.

RHB Cap remains a bank that is poised for a merger and acquisition exercise. Last year, it was involved in a mega-bank merger with CIMB Group Holdings Bhd and Malaysia Building Society Bhd that was however, called off.

Still, not all are convinced about the merits of the OSK mega property merger exercise. Aside from the valuation issues, critics also reckon that the exercise would lead to Ong gaining more for himself than minorities. For example, is the exercise driven by Ong in order for him to gain a bigger control over OSK Holdings, because of the latter’s stake in RHB Cap?

But Ong dismisses this notion. “Firstly, if all minority shareholders accept the share exchange offer, my stake in OSK Holdings would be around 45%. If they don’t accept the offer, my shareholding will be around 55%.”

He adds: “As a major shareholder, if I don’t believe there is value in OSK Holdings, I would not have swapped my 73% interest in OSK Prop and 30% interest in PJD for OSK Holdings shares.”

Ong, as part of the merger exercise, forked out some RM150mil to exercise his warrants in OSK Property and PJD, to ensure he is not diluted via the exercise.

“I did not cash out from my shares arising from this transaction.Why do I want to convert all my warrants in OSK Prop and PJD and invest additional RM150mil in exchange for OSK shares? It’s very simple, because I see great potential in the merged and enlarged group,” he says.

The savvy investor

Considering that Ong is banking his fortunes on the creation of this mega-merger, would investors do good to jump into the bandwagon? Ong does have some notable achievements.

For starters, since OSK Holdings’ listing in 1991, Ong says shareholders have benefited immensely through capital appreciation and cash dividends. “From the time we were listed, we have been paying out annual dividends plus several dividends -in-specie, with the total payout exceeding RM1bil,” he says.

Ong’s history traces back to the MBf group, where he stayed put for 17 years until he became general manager. He is known as a conservative and disciplined stockbroker.

Ong was said to be close to the late Tan Sri Loy Hean Heong during his time at MBf, evident in the present OSK building previously housing the MBf group.

Together with a few partners, Ong bought OSK in 1985. It is said that his ability to read the market well was one of the qualities that helped keep OSK going, through the Asian financial crisis in 1997.

But will Ong succeed in convincing the minorities of OSK Prop and PJD this time around?

Minority shareholders of the two companies have three options: exchange their shares for OSK Prop or take the cash option or do nothing but hold unto their shares.

The latter option would pose a problem for the mega-merger to happen, as synergies can’t be easily derived if minority interests are still present in the two companies.

Ong though plays down concerns of such a scenario. “Minority shareholders are at liberty to hold on to their shares and we will respect their decision to do so,” he says. - By The Star