PETALING JAYA: The civil servants pay hike will be a shot in the arm for property developer OSK Holdings Bhd
, as it will mean higher borrowings.
Hong Leong Investment Bank (HLIB) Research said this in a report following the announcement by Prime Minister Datuk Seri Anwar Ibrahim last week that civil servants’ salaries will be hiked by more than 13%.
Anwar later explained that the pay rise for those in the lower category could even be higher between 20% and 40%.
The hike, which is expected to come into effect this December, has to be approved in Parliament via Budget 2025.
HLIB Research said OSK’s current penetration in civil servant financing is less than 0.7% of about more than 1.7 million civil servants, This indicates there is a large untapped market with few major competitors for OSK.
“The meaningful hike in salary should raise civil servants’ loan eligibility, allowing for higher loan borrowing,” the research house said in a note yesterday.
HLIB Research said OSK’s capital financing segment, which caters to both the Malaysia and Australia markets, is an emerging primary growth driver.
The research house added OSK is now more confident in scaling up its loan portfolio in Australia, as the group has more than two years in the market and better understanding of the industry landscape.
“We anticipate improved pre-tax profit margin for the capital financing segment in 2024 and beyond given the growing civil servant and Australia segments which have better net interest margin than Malaysia’s conventional financing.
“It is also due to better economies of scale for both civil servants and Australia segments as loan portfolio size has surpassed its critical mass enabling optimal operational efficiencies,” HLIB Research said.
The research firm projects that capital financing has the potential to match the property development’s contribution in two to three years’ time, as it expects the capital financing segment to sustain a compounded annual growth rate of more than 20% in terms of pre-tax profit.
In the financial year ended Dec 31, 2023, the pre-tax profit of OSK’s capital financing segment rose by 35.5% year-on-year to RM85.1mil.
HLIB Research said this segment’s loan portfolio and pre-tax profit’s compounded annual growth rate was 25.2% and 25.9%, respectively, over a five-year period from 2018 to 2023.
“This growth was driven by the successful expansion into new segments, including financing for civil servants and Australia capital financing in 2021. Both segments experienced significant expansion from 2021 to 2023,” it said.
As for OSK’s property development division, HLIB Research anticipates stronger earnings from better progress billings as several of its high-rise projects enter into more advanced stages of construction.
Cost savings recognition from the handover of several projects including You City is also another driver.
“Meanwhile, cables should see stable demand growth while the industrialised building system (IBS) should see strong growth given the recovering property demand and increasing IBS adoption among contractors, while there is also still room to scale up utilisation rate,” the research house said.
HLIB Research maintained a “buy” call on OSK with a target price of RM2.16.
