The record cash reserves were achieved as the Penang-based company, earlier synonymous with the Honda marque, shifted its core business from automotive operations to oil palm plantations in the past few years.
Still, the ballooning of its cash reserves has not been fairly reflected in OHB’s share price and market value.
The stock closed three sen higher at RM5.17 yesterday.
Based on its 620.39 million shares outstanding, OHB’s market value stood at RM3.21 billion. After stripping out its net cash of RM1.93 enterprise value is at RM1.28 billion.
OHB reported a net profit of RM66.83 million or 10.77 sen a share for the six-month ended June 30, 2010. Its pre-tax operating profit amounted to RM116.69 million, of which RM47.54 million was contributed by the plantation division.
Other businesses such as automotive, plastic products and property development together contributed RM14.9 million in pre-tax operating profits while “investment holdings and financial services” generated another RM54.25 million, comprising interest income, returns on shares and bond investments.
Stripping out income from investment holdings and financial services, pre-tax operating profits from plantation and other businesses amounted to RM62.44 million for the half year, or RM124.88 million on an annualised basis.
Thus, OHB’s enterprise value of RM1.26 billion works out to be about 10.2 times its annualised pre-tax operating profit for this year, excluding income earned from its cash reserves.
Despite its origins in the motor business, the automotive operation has taken a backseat in OHB as far as profit contribution is concern.
After losing its Honda franchise in 2000 and ending up with only a 15% stake, OHB sold its entire 60% interest in the local Hyundai vehicles franchise last year to Sime Darby Bhd. While the company still keeps the car dealership business and the automotive assembly operation, their contribution to earnings is not substantial.
In contrast, OHB’s plantation operation has gained prominence within the company.
According to its annual report, the company has 37,248 ha of land bank for oil palm plantation as at end 2009, of which 26,459ha is planted. About 83% of the trees planted are in prime age.
In 2009, OHB produced 649,360 tonnes of fresh fruit bunches (FFB), comprising 110,126 tonnes from Malaysia and 539,234 tonnes from Indonesia. This was an increase of 16.9% from 2008’s production of 555,530 tonnes and 7.3% higher than 2007’s production of 605,334 tonnes.
The size of OHB’s FFB production is considered sizeable by plantation industry standard, considering the fact that Genting Plantations Bhd, a “mid-size” planter, produced 1.16 million tonnes of FFB in 2009.
But as a planter, OHB may lack the catalyst for growth. Except for its 10,789ha land bank in Indonesia that provides avenue for expansion, the company has not announced the acquisition of any new plantation asset since 2007.
Nevertheless, with favourable crude palm oil prices, earnings and cash flow from OHB’s plantation division are expected to be strong. This should increase the company’s cash reserves and lend some positive support to its share price, which is up 8.2% year-to-date and has underperformed the FBM KLCI, which rose 12.5% year-to-date.
It will be difficult for investors to ignore the rapid build-up of cash in the company. This could potentially lead to higher dividends in the future, as the company has not seen many active corporate developments.
OHB paid a 10 sen gross dividend per share in 2009, which translated into after tax dividend payment of RM38.77 million.
After adjusting for a one-for-five bonus issue implemented in July, the effective gross yield is 2.3% based on yesterday’s share price. It paid RM62.04 million in 2008. The highest amount of dividend it paid out over the last five years was RM88 million in 2007.
This article appeared in The Edge Financial Daily, September 3 2010.
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