Investment Highlights

• We maintain BUY recommendation on Mah Sing Group (Mah Sing) with an unchanged SOP-based fair value of RM0.95/share and a neutral ESG rating of 3 stars (Exhibits 4 & 6). Our SOP inches up marginally from the newly acquired Kepong land for the M Nova project.

• Mah Sing’s 9MFY21 core net profit (CNP) (excluding forex gain and allowance for impairment loss on financial assets amounting to RM1mil) of RM120mil came in within our expectation but above consensus, accounting for 67% of our FY21F earnings forecast, and 80% of street’s. Given that 9MFY20 accounted for 65% of FY20 CNP, we expect a stronger 4QFY21 with the relaxation of movement restrictions.

• The group’s 9MFY21 CNP increased by 33% YoY from: 1) a 13% rise in properties’ progress billings; and 2) 31% growth in manufacturing revenue, which partly cushioned the weaker performance in hotel operation (-21%) and investment holdings (-28%).

• The property development’s 9MFY21 operating profit rose 66% YoY, attributable to a 13% increase in progress billings and construction activities. Cumulatively, Mah Sing’s 9MFY21 new sales surged 51% to RM1.3bil (from RM847mil in 9MFY20), meeting 80% of its unchanged FY21F sales target of RM1.6bil (Exhibit 3).

• The strong sales were mainly boosted by projects in the central region, particularly M Luna in Kepong (27%), M Centura/M Arisa (20%) in Sentul, M Vertica in Cheras (13%), M Adora in Wangsa Melawati (12%), Meridin East in Johor (8%) while the remaining projects made up 20%.

• Hence, the group’s unbilled sales grew 14% YoY to RM2bil as at 30 September 2021. However, the company is likely to scale down new launches in 4QFY21 as 9MFY21 launches of RM1.2bil have only reached 50% of its initial launch target.

• The manufacturing division, which now includes both plastic and glove businesses, registered a slight operating loss of RM0.4mil in 9MFY21 (from an operating profit of RM8mil) as the higher sales of plastic pallets and automatic parts were offset by the glove plant’s pre-operating expenses and lower production volume during movement restrictions.

• While 9MFY21 hotel revenue dropped 21% YoY to RM8mil, the absence of impairment charges on hotel assets reversed a RM13mil loss in 9MFY20 to a RM0.6mil operating profit in 9MFY21 .

• YoY, investment holdings recorded a 28% decrease in revenue to RM23mil and a wider 40% drop in operating profit to RM8mil in 9MFY21 due to lower interest rates on reduced short-term funds.

• QoQ, 3QFY21 net profit slid by 1% to RM40mil from weaker manufacturing profits which were largely offset by stronger contributions from property, hotel and investment holdings.

• On a separate note, Mah Sing has entered into a conditional sale and purchase agreement to acquire an 8.1-acre parcel of leasehold land in Kepong, Kuala Lumpur for RM95mil cash, which will be settled within 12 months from now. The land is 4km away from its existing project, M Luna and Kepong Metropolitan Park (Exhibit 5).

• The acquisition price translates to RM270 psf and implies a cost-to-gross development value (GDV) ratio of 12%, which is within the 10%–20% range for mixed development in Klang Valley. While there were several recent identical transactions within the immediate area, our channel checks indicated that asking prices surrounding the neighborhood with land areas smaller than 1 acre (43,560 sq ft) have a wide range of RM246 psf to RM499 psf.

• The group plans to develop the project called M Nova with an indicative GDV of RM790mil, which will consist of service residences priced from RM318k/unit and above. The project is scheduled for launching by 3Q2022 and expected to be developed over a span of 4 years.

• We are positive on the development given its good connectivity with accessibility via the MRR2 and Duke Highway, near Pasar Borong Selayang and the Bukit Lagong Forest Reserve. We are optimistic that the project will garner strong interest due to the spill-over demand from M Luna (selling price starting from RM385K) which reported a 90% take-up rate within 2 years from its launch in June 2020.

• While maintaining our FY21–22F forecasts, we expect the contribution from M Nova to only slightly lift FY23F earnings by 3% while net gearing inches up by 8% to 0.26x in FY22F.

• The stock currently trades at an attractive FY22F PE of 7x vs. its 5-year average of 12x.

Source: AmInvest Research - 1 Dec 2021