The sale by Oriental Holdings Bhd, the listed arm of the late Tan Sri Loh Boon Siew’s family, of its interest in the Hyundai franchise to Sime Darby Bhd recently went relatively unnoticed.

What’s intriguing is that the group that is famed for its assembly and distribution of Honda cars and motorcycles is slowly but surely easing out of the lucrative automotive distribution business in Malaysia. The automotive division — once the bread-and-butter business of Oriental — is dwindling.

It started in 2000 when Oriental lost a controlling stake in its mainstay, the Honda franchise.

In its place, the group set about establishing itself as the franchise holder for three fast-selling Hyundai models — Sonata, Elantra and Accent. Oriental’s managing director Datuk Robert Wong had told the media that the group was positioning the Hyundai models as a replacement for its lost Honda franchise.

But Oriental’s entry into the Hyundai operations in Malaysia created confusion in the marketing of the South Korean marque here. This was because the Berjaya Group, together with Hyumal Motor Sdn Bhd, was already handling the distribution of certain Hyundai marques such as Atos and Matrix. (Berjaya Group later sold its interest in the Hyundai operations to Sime Darby in 2004.)

The Hyundai business, which used to be lucrative a few years ago with the popularity of the previous Sonata, Elantara and Accent models, is no longer doing well, thus prompting Oriental to sell its stake.

Oriental sold its 60% interest in Oriental-Hyundai Sdn Bhd — the franchise holder for the three Hyundai models — to Hyumal, which is now a subsidiary of Sime Darby, on June 3 for RM19.8 million cash. After the sale, Oriental still retains its dealership for Hyundai cars.

Its other interests in the automotive sector are a 15% stake in Honda Malaysia Sdn Bhd (which is the local franchise holder of Honda cars) and a car assembly plant in Tampoi, Johor (which assembles China marques such as Cherry and Berjaya ChangAn).

Without a franchise, it’s apparent that the automotive-related operations are beginning to contribute less to the group’s bottom line. This inevitably puts pressure on management to grow its plantation and property development business.

Oriental has been involved in property development for many years but it only ventured into oil palm plantation in 2002 in a bid to diversify the group’s earnings stream.

Healthy cash pile
Due to its conservative strategy, the group’s property and plantation businesses have not grown at a fast pace over the last few years. But the global financial crisis may present more opportunities for Oriental, which sits on a net cash of RM1.44 billion as at March 31, 2009. With a healthy balance sheet, the group is in a strong position to scoop up cheap plantation assets and development landbank or properties.

It is worth noting that for 1Q2009 ended March 31, property development had become the largest earnings contributor to the group, accounting for RM28.5 million or 29.7% of Oriental’s group’s operating profit.

This was followed by the automotive division (RM24.1 million), plantation (RM20.7 million), investment holdings and financial services (RM16.9 million), hotels and resorts (RM10.8 million), and plastic products manufacturing, which posted an operational loss of RM5.1 million during the period.

In the previous corresponding quarter, the automotive division was the biggest profit earner to the group, contributing RM61.1 million or 48.3% of group operating profit, followed by plantation activities (RM39.4 million), investment holdings and financial services (RM12.1 million), property development (RM3.4 million) and others.

A tougher market environment has dented sales of vehicles, thus hurting the contribution of the automotive division in 1Q2009. Meanwhile, a drastic fall in crude palm oil prices has reduced the contribution from the group’s plantation operations. Nevertheless, the big surprise came from property development, where there was a big jump in earnings. It is believed that the property division is boosted by a reclamation and property project in Melaka.

For 1Q2009, Oriental’s total revenue and net profit amounted to RM889.9 million and RM52.9 million, respectively. Both revenue and net profit were down 30.2% and 30% y-o-y. Meanwhile, operating profit before working capital changes dropped to RM86.3 million compared with RM165.7 million in the previous same quarter.

But despite a more challenging operating environment, the group has grown its net cash holdings to RM1.44 billion or RM2.79 a share, from RM1.35 billion a year ago. The cash reserves currently made up a sizeable portion of the group’s net asset value (NAV) of RM3.64 billion (equivalent to its shareholders’ fund), or RM7.04 per share, as at March 31, 2009.

Oriental, at its last Thursday’s closing price of RM5.30, has a market value of RM2.74 billion. At this price, the group is currently valued at a 24.7% discount to its NAV, at about 12.9 times its annualised 1QFY2009 earnings, and 2.3% net historical dividend yield (FY2008’s dividend payment amounted to 16 sen a share less 25% tax, or a total of RM62 million net-of-tax).

The valuation of the group fails to reflect the potential of its assets, such as development landbank in Penang and the Klang Valley acquired many years ago, that have not been revalued and are still carried at cost.

For instance, the group owns a 24-acre plot of vacant freehold land in Mukim Paya Terubong, in the northeast district of Penang, which was acquired in 1972, and is still carried at a net book value (NBV) of RM300,000. It also owns 39.3 acres of vacant freehold land in Tanjung Bungah, Penang, which is carried at a NBV of RM13.1 million. And the list goes on.

However, the argument is that investors need to see that Oriental’s management is taking a more proactive step to realise the potential of these undervalued assets and maximise returns to shareholders, or make use of its ample funds to grow the existing business or expand into new ventures. It is also important for management to communicate to shareholders its business strategy and direction, going forward, otherwise, Oriental’s shares will continue to underperform the general market.

Nevertheless, in Oriental’s annual report published earlier this month, its chairman said  the group is actively looking to purchase suitable plantations to increase the current planting hectarage of about 40,000 to 60,000, and is evaluating a number of estates, both locally and overseas.

Considering how the landscape for the automotive business has changed, nobody would blame the group for its emphasis on plantations. Hopefully, Oriental can shed more light on its expansion plan, going forward.

This article appeared in Corporate page of The Edge Malaysia, Issue 759, June 15-21, 2009