We continue to like Mah Sing for its asset-light and agile business model which allows it to adapt and pivot its launching strategy in response to the changing sector dynamics. The group’s exposure in the affordable housing segment should continue to do well as home buyers are likely to opt for lower priced properties due to the ending of HOC and rising cost of living. Furthermore the group’s healthy net gearing level of 0.33x and the positive cash flow from projects completion also allow plenty of room for further land banking exercise to anchor its future growth. The group remains committed to its 40% dividend payout policy, which gives a decent projected FY22 dividend yield of 4.0%. Maintain BUY call with an unchanged TP of RM0.87 based on SOP derived valuation.

Business transformation. Mah Sing started out as a residential (mainly in landed properties) and industrial developer with its residences priced in the mid-to-high range. However in recent years, following the property down-cycle that started around 2014, the group pivoted to develop high-rise apartments named as the “M-series” priced at low-to-mid range (see Figure #1). Its M-series developments proved to be highly successful and enjoyed >80% take-up rate within 1 to 1.5 years from launching.

Adaptable business model. The reason Mah Sing was able to quickly adapt and pivot its launching strategy is due to (i) its asset light balance sheet (it does not accumulate and sit on land bank); and (ii) its swift time to market (it takes 7-12 months from land acquisition to launch). As a result, the group was able to mitigate risk of acquiring large parcel of lands that becomes obsolete over time due to external factors, while also mitigating the risk of a mismatch in its supply and market demand from the fast changing and dynamic property market. Furthermore, as its cash is not tied up in large land assets and due to its swift turnaround time from land acquisition to completing construction, the group will be able to continuously generate free cash flow to scale and grow its business. As a result of this agile business model, Mah Sing should be able to pivot back to higher end products with better margin should the property market return to an upcycle.

FY22 sales outlook. While most developers are setting lower or flattish sales target, Mah Sing is setting a higher target of RM2bn (+25% YoY) for FY22, indicating its optimism and confidence in the market. Its sales target is well supported by (i) unbilled sales of RM1.9bn (cover ratio of 1.4x); and (ii) launch target of RM2.4bn (+71.4% YoY). We believe that its product offering with majority priced in the affordable segment (c.60% priced at <RM500k) will continue to do well given that it will benefit from the ending of HOC (no more stamp duty waiver for competing mid-range properties) and rising cost of living.

Strategic launches nearby MRT3. 3 of its major M-series launches (total GDV: RM1.49bn) this year attempts to capture the spill over demand from its previous launches that were located nearby: (i) M Senyum, Salak Tinggi (nearby M Aruna); (ii) M Astra, Setapak (nearby M Adora); and (iii) M Nova, Kepong (nearby M Luna) (see Figure #2 for the list of target launches and sales for FY22). Furthermore, two of the launches, M Astra and M Nova are also strategically located near the new MRT3 line which should help to support take-up rate and lift prices for these developments. Some of its other ongoing projects including M Arisa, M Vertica, M Oscar to name a few are also located nearby the new MRT3 stations (see Figure #3).

Well managed impact from rising construction cost. Key building material cost has seen a steep increase: steel bar (+c.20% YoY in 1Q22) and cement (+c.40% YoY in 1Q22). Nonetheless, management guided that they should be able to sustain their PBT margin of c.18% as (i) they expect no impact from their ongoing projects as costs are already locked in; (ii) they will be able to tender out new projects at competitive price as each of their project bidding are highly competitive with around 10 bids for each project; and (iii) any cost impact on new projects will be passed on through price increase. We believe that Mah Sing would be able to pass on some of the cost as the high take up rates for their products will allow them some flexibility to increase selling price.

Gloves update. Mah Sing has unfortunately entered the glove business during the down cycle of the sector where margins are compressing. Consequently, its share price has also gone through a cycle driven by the glove sentiment as the group was perceived as a glove proxy counter. Nonetheless, we note that the glove assets only make up c.3% of the group’s total asset base and as such, we view this business as a non-core segment for the group. Management had also shared that they intend to divest both the plastic and glove manufacturing segments through a separate listing within 5 years. We view this long term strategic plan positively as the manufacturing businesses does not have synergistic value with its property business, and as such, a divestment could likely unlock more value to the shareholders. In the near term, we believe that the group should be able to fill up its capacity gradually as it only has 12 lines with annual capacity of 3.68bn pieces (c.11% of Kossan’s capacity as comparison). With better utilization, the segment should be able to turn cash flow positive.

Forecast. Unchanged.

We maintain BUY call with an unchanged TP of RM0.87 based on SOP derived valuation. We continue to like Mah Sing for its asset-light and agile business model which allows it to adapt and pivot its launching strategy in response to the changing sector dynamics. The group’s exposure in the affordable housing segment (c.60% priced at <RM500k) should continue to do well as home buyers are likely to opt for lower priced house due to the ending of HOC and rising cost of living. Furthermore the group’s healthy net gearing level of 0.33x and the positive cash flow from projects completion also allow plenty of room for further land banking exercise to anchor its future growth. Finally, the group remains committed to its 40% dividend payout policy, which gives a decent projected FY22 dividend yield of 4.0%.

Source: Hong Leong Investment Bank Research - 15 Apr 2022