Investment Highlights

• We upgrade Mah Sing Group (Mah Sing) to BUY from HOLD as its 18% share price decline over the past 6 months has offered higher upside potential to our unchanged SOPbased fair value of RM0.95/share. We have a neutral ESG rating of 3 stars (Exhibits 1 & 2) for Mah Sing.

• We are keeping our FY21F earnings forecasts pending the company’s 3QFY21 results to be announced by end November.

• Here are the key takeaways from our recent engagement with the group’s executive director Datuk Steven Ng:
  • Recall that projects in Klang Valley remained the largest segment, contributing 88% of the group’s 1HFY1 sales, followed by Johor (9%) and Penang (3%). Given the improved prospect for Klang Valley’s property market as it moved to the National Recovery Plan Phase 4, the sales target of RM1.6bil is likely to be achievable. The group’s 8MFY21 secured sales at RM1.1bil accounted for 68% of its full-year sales target.
  • Construction progress is back to full force in September, and Mah Sing is confident that the projects will be mostly delivered on time as the group usually has a 6-month buffer period in its construction arrangements with contractors vs. handover to home buyers.
    Also, under the Temporary Measures for Government Financing [Coronavirus Disease 2019 (Covid-19)] (Amendment) Act 2021, the handover of vacant possession can be extended if it is due to delays caused by movement control orders. Hence, the possibility of being charged with liquidated ascertained damages is minimal at this stage.
  • Meanwhile, we think that rising raw material costs such as steel, tiles and sanitary items would not affect the margin of Mah Sing’s existing property projects as the corresponding sub-contracts have been awarded earlier. Contractors which have a long-term relationship with the group are less likely to pass the additional costs on to the developer as the contracts have already been signed.
    We also understand that the current construction environment remains lacklustre due to the lack of major rollouts of public infrastructure projects. Thus, we believe property developers, including Mah Sing, have more bargaining power on the bidding price for their future developments at this stage. Even so, the specifications of future project launches can be adjusted for any inflation in raw material costs.
  • Mah Sing reiterated its plan of listing the manufacturing arm (combination of plastic division and glove business) within the next 5 years, probably in the Hong Kong stock exchange. In 1HFY21, the plastic division contributed a substantial 21% of the group’s revenue and 10% of pre-tax profit. Over the past 3 years, this division registered a comfortable 1HFY18-–HFY21 CAGR revenue growth of 7.6%. On the other hand, we expect contributions from its glove manufacturing would only materialise in 4QFY21 given significant pre-operating costs while the EMCO halted production for 2 weeks in the 3QFY21. Presently, 8 out of 12 planned factory lines have commenced operations while 2 installed lines are at the testing stage. The final 2 lines are targeted to commence production by end-November.
  • We maintain our revenue projection of RM122mil for FY21F premised on a plant utilisation rate of 15% and glove average selling price (ASP) of US$52/1,000 pcs. For FY22F, we have also not changed our assumption of plant utilisation rate of 50% and ASP of US$34/1,000 pcs, which translates to a revenue of RM250mil.
  • The stock currently trades at FY21F PE of 11x vs. its 5-year average of 12x.

Source: AmInvest Research - 18 Oct 2021