Promising growth of OYL draws interest


BY KATHY FONG

AS economic conditions turn harsh, OYL Industries Bhd is usually on the recommended list when defensive stocks that pay good dividends come into favour.  

However, it is also a stock worth looking at if one wants attractive earnings growth. 

“It is not easy to find a stock that has a good dividend payout and strong earnings growth. OYL is one of the few,'' said an analyst. 

The promising growth prospect of the global air-conditioner manufacturer draws investors' attention. There is also an increasing number of analysts keeping track of the group. 

“OYL is a growth stock with attractive valuation on price-earnings (P/E) ratio and dividend yield,'' said Kim Eng Research. 

OSK Research expects double-digit earnings growth for OYL, led by ongoing capacity expansion and opportunities to penetrate large markets like India, South America and the Middle East. 

OYL is ranked second worldwide in terms of efficiency and fourth in terms of global market share in the heating, ventilation and air-conditioning industry. 

The group manufactures air-conditioning and ventilation systems for brands such as McQuay, Acson, York and Mitsubishi Electric, and has manufacturing facilities in 14 countries. 

The steady rise of OYL share price reflects investors' preference for the counter. 

The stock has gone up 165% or RM16.50 since January 2000 to RM26.50 last Friday. It was at RM10 on Jan 3, 2000. 

The gain on OYL share price is considered the heftiest among the defensive stocks on the KLSE, including British American Tobacco (M) Bhd, Guinness Anchor Bhd, Nestle (M) Bhd and Carlsberg (M) Bhd, although its dividend yield may not be as good as theirs. 

In fact, some stock prices are now lower than the level on Jan 3, 2000. 

Not all analysts who cover OYL are promoting the stock at such high price. But they concur that the substantial increase in OYL share price does not warrant a “sell” call. 

“Short-term investors who are tempted to take profit may do so. Defensive stocks are unlikely to outperform the current market,'' said an analyst from a US-based stockbroking house. 

Nonetheless, he also said it would be a wise decision to keep the shares for dividend payment and capital gains. 

Despite the volatile economic environment, OYL's after-tax profit up to its financial year (FY) ended June 30, 2002, had quadrupled since the FY 1998.  

Analysts who have made company visits to OYL would have been told that the management's target of achieving earnings per share (EPS) of RM4 or RM5 by financial year ending June 2007. 

If the management meets its ambitious target, this would mean the possibility of OYL share price doubling from the current price. 

For the nine-month period ended March 31, OYL pre-tax profit rose 11% to RM197.86mil, on a higher turnover of RM3.15bil. EPS came in at RM1.057 sen. 

Asia is expected to be the growth centre for OYL.  

The pre-tax margin was the highest among all the other regions, at 17%, compared with the US and Europe which is about 3% to 4%, said TA Securities.  

Besides the huge Chinese market, analysts said the Asean region and Australia would also generate exciting growth. OYL wants a share in the Middle East market, too. 

To leverage on low operating cost, OYL is moving its international headquarters to China, where it already has two manufacturing plants and the third one is under construction. 

TA Securities said OYL had adopted the right strategy to garner a big share in the highly competitive Chinese market.  

It focuses on the commercial segment where competition is less intense than the consumer segment. The rush of multinational companies to China to set up production facilities would spur demand for air-conditioning units, said TA Securities. 

Five years back, OYL was only known as a subsidiary of Hume Industries Bhd.  

Its inter-company loans caused concerns among investors. And the newly-acquired assets in Europe and the US were not appealing and efficiency was rather low then. 

Things are different now after the management's hard efforts to reengineer the operation in Europe and the US by putting in the “Asia inputs”.  

Analysts notice that the group has achieved economies of scale and better efficiency as shown by the impressive jump in pre-tax earnings over the years, although top-line growth has not been immense.  

OYL's generous dividend payment has helped pare down the inter-company loans owed by parent company.  

Hong Leong Co (M) Bhd becomes the largest shareholder after Hume Industries distributed the OYL stake to its shareholders. 

OSK Research said OYL would be able to repay all its bank borrowing and support dividend payments of close to RM140mil with its strong cashflow of more than RM300mil annually. 

“We are confident that OYL is able to maintain its dividend yield of at least 5% annually and we would not be surprised if it were to distribute surplus cash to shareholders in the future,'' said OSK Research.  

The group's rising retained profit of RM907mil (as at March 31) and its small share capital of 136.8 million shares also made bonus issue an option to reward shareholders, said analysts. 

A bonus issue would also help increase the liquidity of the stock, said an analyst. 

For the latest OYL share prices and charts click here

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