OSK Holding ... Nov11

Inet Research

1. 3Q2011 Results Highlight / Review
- 3Q11 results were 10% ahead of our full-year projections on an annualised basis but we are
maintaining our forecasts in light of the uncertain stock market and economic environment, which may affect 4Q11.

- 3Q11 revenue improved by 13% YoY, largely reflecting stronger performances at the investment banking (IB) and loan & financing divisions. PBT declined by 12% YoY due to lower IB margins and higher financing costs.

- Assuming a Dec 2012 PER of 17x suggests a price target of RM2.00/share (implied PBR of 1.2x to Dec 2012). We continue to like the group’s growth potential both locally and regionally, and believe that a potential merger with RHB Capital would be positive. BUY recommendation maintained.

2. Key Investment Risks
Key investment risks for the stock include:
a) Volatile stockmarket, economic and political conditions, which would affect the group’s investment banking and financial services operations, both locally and overseas;

b) Unfavourable foreign exchange movements, which would affect the translation of foreign currency denominated revenues and earnings from Singapore, China & HK, Indonesia, and Cambodia;

c) Changes in government policies domestically and in countries where the group has operations, which may affect the competitive landscape and in turn impact margins and market share;

d) Intense competition for skilled and professional personnel in the financial services industries, which
may affect the group’s operating results.

3. Recent Developments
On 29 Sep 2011, the group submitted an application letter to BNM to seek an approval in principle to
commence negotiations with RHB Capital (RHBC) for a possible merger of businesses between OSK
investment banking (OSKIB) group and RHB banking group. On 13 Oct 2011, BNM stated that it has no
objection in principle for OSKIB to commence negotiations with RHBC for the possible merger of businesses.

The approval to commence negotiations is valid for a period of three months.
On 15 Nov 2011, RHBC managing director, Kellee Kam was quoted in The Star as saying that the merger
discussions between RHBC and OSKIB were going well and that both parties were hoping to come to an
agreement by mid-December.

The merger is expected to create synergies since RHBC’s strength is its exposure to larger capitalised
corporations and institutions whilst OSKIB’s strength lies in its retail broking business as well as the group’s
fast-growing regional investment banking business outside of Malaysia in Indonesia, Thailand, Singapore,
Cambodia and Hong Kong.

The merged entity would also be the largest investment banking group in Malaysia with a combined market
share of 13.7%, overtaking CIMB Securities’ share of 10.5%. Currently, OSKIB is the fourth largest retail
broker in Malaysia with a 6.7% market share, whilst RHBC is the third largest with a market share of 7.0%.

4. Earnings Outlook
For FY2011F, we are projecting relatively flat group revenue and lower net profit due to our assumption of
lower trading volumes and margins in 2H11.
Beyond FY2011F, OSK’s growth prospects are expected to be driven by:

i. Institutional equities, as OSKIB shifts its equities business from being 70% retail-based to a more
balanced 50:50 split between retail and institutional equities within the next three years, focusing on
small to mid-cap stocks in the region;

ii. Corporate finance, with OSKIB’s leadership position for IPOs in the region being #1 by volume in
Malaysia and Singapore and #3 in Indonesia for the year 2009;

iii. Equity capital markets, as OSKIB has one of the largest regional presence among ASEAN
investment banks tapping into a large base of institutional and retail clients across the region;

iv. Treasury, as the relatively new division has high growth potential from a low base via a
diversification of products and leveraging on the group’s regional network to identify new
opportunities;

v. Corporate loans, as the group benefits from growth in investment banking operations via bridging of
funding gaps, and more new branches at the group’s commercial bank in Cambodia;

vi. The inclusion of Thailand’s BSEC from 2012F.

5. Valuation & Recommendation
Assuming a Dec 2012 PER of 17x suggests a price target of RM2.00/share (implied PBR of 1.2x to Dec 2012).
We continue to like the group’s growth potential both locally and regionally, and believe that a potential merger with RHB Capital would be positive. BUY recommendation maintained.