• Mahsing announced to repurchase RM315m nominal value of redeemable convertible secured bonds (CBs) at a purchase consideration of RM337.1m. The CBs will be cancelled after the purchase. 

• The CBs are currently in the money given conversion price of RM1.14 versus yesterday’s closing price of RM1.25. CBs are convertible at any time up to maturity date on 8 June 2018. 

• Based on the purchase consideration of RM337m and conversion price of RM1.14, the effective repurchase price is RM1.22 per share which represents a 2.4% discount to yesterday’ closing price of RM1.25.

• Given an effective interest rate of 6.5% and nominal value of RM315m, we estimate interest saving of RM20m per annum. Consequently, FY16 and FY17 EPS will be enhanced by 4% and 3% respectively. RNAV will also be higher by 5%.

• Gross gearing will be reduced from 0.5x to 0.4x with net gearing remaining unchanged.

Pros/Cons

• We are positive on the repurchase deal as it will avoid EPS dilution by 12%, assuming full conversion of CBs.

• The CBs repurchase will be fully funded by internal cash. Balance sheet remains solid with net gearing at 0.06x, providing room for further landbanking exercise amid softening market outlook.

Risks

• Slowdown in sales;

• Escalation in construction and raw material costs; and

• Delays in launches.

Forecasts

• FY16 and FY17 EPS will be enhanced by 4% and 3% respectively.

Rating

HOLD

• Healthy balance sheet with low net gearing; and attractive dividend yield of 4.9% based on minimum dividend payout of 40%.

Valuation

Despite being RNAV accretive, we maintain HOLD cal l with TP adjusted from RM1.44 to RM1.40 after raising the discount to RNAV from 35% to 40% in view of the challenging property outlook amidst subdued consumer sentiment and tight loan environment.