Investment Highlights

• We maintain BUY on Mah Sing Group (Mah Sing) with an unchanged SOP-based fair value of RM0.86/share, which reflects a neutral 3-star ESG rating (Exhibits 4 & 5). We continue to like Mah Sing for its strong focus on affordable housing projects at strategic locations which have strong demand.

• Pending the company’s 3QFY22 results this month, we maintain our earnings forecast.

• We recently met up with Mah Sing’s management for updates. Here are the key takeaways:
  (i) Since May 2022, despite 3 consecutive hikes in the overnight policy rate cumulating to 75bps, Mah Sing’s sales momentum in 3QFY22 remained strong with average weekly bookings of RM100mil, on par with 1HFY22. It was also higher than the RM70mil–RM80mil achieved in FY21 post-lockdown. Hence, management is confident of meeting its FY22F sales target of RM2bil. To recap, up until 1HFY22, Mah Sing has already secured new sales of RM1bil representing 50% of its FY22F sales target.
  (ii) Management’s FY23F sales guidance is likely to be announced in early 2023. In the meantime, we expect its FY23F sales target to be higher than RM2bil in FY22F, driven by new launches in the pipeline and continuous strong demand for its M-series products. 
  (iii) In July 2022, Mah Sing debuted its own homeownership campaign, namely Home Ownership Made Easy (H.O.M.E.). Under the H.O.M.E. campaign, Mah Sing ties up with banks to offer a financing scheme with zero down payments, free stamp duty, easier loan approval, and lower monthly payments (stepup financing) for homebuyers to purchase properties. We believe that the H.O.M.E. campaign will mainly be targeted at first-time home buyers that require high financing margins. This will provide more sales impetus for its projects, particularly the affordable M-Series properties (Exhibit 2). Meanwhile, the higher stamp duty exemption (to 75% from 50%) for the purchase of residential houses valued from RM500K to RM1mil serves as another catalyst for Mah Sing’s property sales growth.
  (iv) Mah Sing reported an average conversion rate from booking into actual sales of 50%, which was slightly higher than the average loans approval rate of 40%. We are not too concerned on some cancelled bookings in the short term as the group still has healthy reservations pending conversion of RM782mil as at 22 August 2022.
  (v) As at 30 June 2022, unsold inventories stood at RM668mil. Close to 50% of the unsold inventories are from the Johor state. Industrial properties in Johor, namely i-Parc @ Tanjung Pelepas constitutes 14%-15% of total unsold inventories. Notably, we understand from management that the remaining inventories in i-Parc @ Tanjung Pelepas have been sold off and revenue from the sales is expected to be recognised in 4QFY22 after the completion of documentation process.
  (vi) Mah Sing has room to increase the pricing in subsequent phases of its housing projects, supported by strong take-up rate of its existing phases (Exhibit 1). We anticipate that demand for the projects to remain robust in spite of rising selling prices due to its strong brand recognition and affordable pricing strategy.
  (vii) As at 30 Jun 2022, industrial property constitutes 1% of Mah Sing’s remaining GDV. As fast-growing e-commerce drives demand for industrial properties, Mah Sing intends to explore opportunities in industrial products, particularly in southern part of the Klang Valley region (i.e. Sepang) and states in the northern region (i.e. Johor). Historically, Mah Sing enjoyed a higher profit before tax margin of >20% from industrial products as compared to 18% for residential properties. Hence, we believe that the exploration into the fast-growing industrial property sector could propel Mah Sing’s margins higher. Nevertheless, its affordable project, the M-Series residential property remains the core product segment of the group.
  (viii) Mah Sing is able to mitigate the impact of rising interest rate by having a healthy debt profile with 65% of fixed-rate debt and 35% of floating-rate debt. In addition, the group has locked in the profit rate of its fixed-rate sukuk at the rate ranging from 3% to 4.9% p.a. prior to the commencement of interest rate hikes in May 2022. With the proactive refinancing of financial instruments before the OPR normalisation to 3.00% (pre-pandemic level), Mah Sing is envisaged to be able to enjoy a relatively lower interest expense on its existing borrowings over the next 3 to 5 years (Exhibit 3).
  (ix) Apart from continuous efforts to acquire land in the Greater Klang Valley, Mah Sing is also embarking on land-banking activities in Seremban, Perak and Melaka for affordable landed housing. The current low net gearing ratio of 0.3x provides sufficient room 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.
  (x) Mah Sing’s unbilled sales of RM2.2bil as of end-June 2022 represents a cover ratio of 1.3x of FY22F property development revenue. This provides earnings visibility over the next 1-2 years for Mah Sing. Meanwhile, the industrywide labour shortage issue has raised concerns over construction progress works and could result in a slower recognition of progress billing/revenue in the near term. Nevertheless, we understand from management that foreign labourers are coming in phases and worker constraints are expected to be resolved by early 2023.
• The stock currently trades at a bargain FY23F PE of only 7x vs. a 4-year average of 11x and offers an attractive dividend yield of 7%. 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) healthy FY22F gearing of 0.3x with 65% of borrowings in fixed rate, which will not be adversely impacted by higher interest rates.

Source: AmInvest Research - 4 Nov 2022