Investment Highlights

• We maintain BUY on Mah Sing Group (Mah Sing) with an unchanged SOP-based fair value of RM0.93/share and a neutral 3-star ESG rating (Exhibits 2 & 3). We continue to like Mah Sing for its strong focus on affordable housing projects at strategic locations which have strong demand.

• We lower our FY22F/FY23F/FY24F net profit by 23%/22%/26% to reflect earnings after accounting for distributions to be paid to the holders of perpetual securities. The perpetual securities are classified as equity in the balance sheet.

• We recently met up with Mah Sing’s management for updates. Here are the key takeaways:
  (i) Despite the expiry of the Home Ownership Campaign on 31 Dec 2021, sales momentum for 1QFY22 remained strong with higher average weekly bookings of RM100mil as compared to RM70mil–RM80mil in FY21 post-lockdown. Management is confident of meeting its FY22 sales target of RM2bil. Key contributors to the new sales will be existing projects in Klang Valley as well as newer projects to be launched later this year comprising M Senyum, M Astra and M Nova (M-Series projects) (Exhibit 1).
  (ii) 77% of the targeted sales are expected to be derived from Klang Valley/Greater Kuala Lumpur with 19% from Johor and the remainder from Penang.
  (iii) Despite rising building material costs as a result of supply chain disruptions, there will be no material impact to the construction cost of Mah Sing’s existing projects. Mah Sing has locked in construction cost of ongoing projects when the contracts were awarded. For new projects, Mah Sing is looking to increase house prices to preserve its PBT margin of 18% for each affordable housing project.
  (iv) Mah Sing is adopting a new approach on construction management, namely e-model, to reduce its costs. This covers the ownership of design and managing the bulk purchase of construction materials. Hence, the impact of higher building material cost will be mitigated to ensure that house prices remain affordable for its new projects. 
  (v) 60% of Mah Sing’s affordable houses are priced at below RM500,000 while 34% are between RM500,000 and RM700,000 to attract the young and first-time homebuyers.
  (vi) Mah Sing has tied up with Maybank Islamic to offer a rent-to-own scheme, namely HouzKEY. This scheme provides an alternative solution to potential buyers that are unable to secure a loan approval at the desired margin of financing from commercial banks. The HouzKEY scheme has contributed <20% to the group’s new property sales.
  (vii) Apart from continuous efforts to acquire land in the Greater Klang Valley, Mah Sing is also embarking on landbanking activities in Seremban, Perak and Melaka for affordable landed housing. The current low net gearing ratio of 0.3x provides sufficient room to it to gear up for future value-accretive land acquisitions of up to RM600mil by the end of this year, if needed. The group intends to cap its net gearing ratio at 0.5x.
  (viii) Mah Sing will complete the redemption of its perpetual securities worth RM650mil in April 2022 which carry a coupon rate ranging from 6.55% to 6.9% p.a. Meanwhile, during the past 1.5 years, the group has completed the issuance of 3 tranches of sukuk totalling RM1bil at a fixed profit rate ranging from 3% to 4.9% p.a. with repayment periods of 5 to 7 years. With the refinancing of financial instruments under the current low interest rate environment, Mah Sing will reduce the interest expense on its existing borrowings for the next 5 to 7 years.
• The stock currently trades at a bargain FY23F PE of only 6x vs. a 4-year average of 11x and offers an attractive dividend yield of 5%. We believe the mid-to-long-term outlook for Mah Sing remains positive backed by its:
  (i) savvy execution and quick turnaround business model;
  (ii) efforts in digital marketing and strength in offering affordable properties at strategic locations; and
  (iii) improved earnings of its recently started glove manufacturing business after the commencement of new production lines.

Source: AmInvest Research - 5 Apr 2022