Period  2Q13/1H13

Actual vs. Expectations  1H13 net profit of RM139m came within consensus and our expectations, making up 48% of street’s estimates and 50% of ours. Sales in 1H13 of RM1.5b is in line with our and the company’s FY13E target of RM3.0b. The major drivers were Mah Sing i-Parc, M Residence 1@Rawang, M City@Jalan Ampang and Meridin@Medini.

Dividends  None as expected.

Key Results Highlights  YTD, revenue declined 1.5% YoY due to lower contributions from mostly high-rise projects, which were still at early stages of construction. However, the 1H13 bottom line grew 16% YoY on the back of higher gross margin (+4ppt YoY) and doubling of interest income. The improved gross margin was attributable to higher margin project mix and completed projects. Elsewhere, its plastics division’s operating profits jumped by 35.4% YoY. Both its property and plastics divisions operating margins expanded by 2.1ppt and 1.1ppt to 22.2% and 8.4% YoY, respectively.

 QoQ, the 2Q13 net profit was flat at RM70m despite a 12.4% increase in revenue. The flattish earnings was due mainly to the lower property operating margin (-2ppt QoQ), lower interest income and higher tax bracket (27.3% in 2Q13 as compared to 24.6% in 1Q13).

Outlook  2H13 sales will be mainly driven by Icon City@PJ, Southville City@Bangi and Southbay City@Penang. Concurrent with the results release, MAHSING announced a land acquisition in Rawang with projected GDV of RM520m. However, significant earnings contributions will only be felt from FY15 onwards (refer to overleaf).

 We also expect net gearing to increase from the current 0.22x to 0.4x by end FY13 which is approaching our comfort ceiling level of 0.5x (refer overleaf).

Change to Forecasts  No changes to estimates. Unbilled sales of RM3.9b provide 1.5 years of earnings visibility.

Rating   Maintain OUTPERFORM

Valuation  We adjusted our FD RNAV slightly higher by 1% from RM3.17 to RM3.20 given the new land acquisition. However, we are widening our discount factor to 20% from 4% as we prefer developers with a lighter balance sheet in view of potential tightening measures, with Budget 2014 just round the corner. Hence our TP is lowered to RM2.56 (RM3.04 previously). Maintain OP as the stock still provides a potential 26% in total return.

Risks  Unable to meet sales targets. This will be more impactful on developers with higher net gearing. Sector risks, including negative policies.

OTHER POINTS

Expanding landbank in Rawang. As M Residence@Rawang is approaching the final stages of development (Phase 4 is scheduled for a launch by Sept 2013), the company has proposed to acquire a 96.71-acre leasehold land in Rawang for RM68.7m or RM16.30psf. The land is strategically located 6.6km from the Rawang toll, 4.0km from the Aeon Jusco on Jalan Batu Arang and about 5km from its existing projects. Besides, it is accessible via North-South Highway and the Kuala Lumpur-Kuala Selangor Expressway. According to management, the land is at closer proximity to established residences and Jusco compared to the earlier two Rawang landbanks.

Fair price tag. At a purchase price of RM16.30psf vs. their earlier Rawang landbanks (Oct-11 @ RM9psf, Mar-12 @ RM6psf) we think the acquisition price tag is fair considering that it has been more than a year since their last landbanking in Rawang and the closer proximity to Jusco. Furthermore, we think the purchase price is considered fair as land price makes up 13% (the first two landbanks was 10% and 6% of respective GDVs) of GDV assuming the project will reap a decent gross development margin of 20%, which is a norm for their affordable township developments.

M Residence 3@Rawang to see GDV of RM520m. This project will be named as M Residence 3@Rawang after the name of M Residence and M Residence 2 with a total GDV of RM520m. The affordable township’s preliminary plans include 2-storey link homes and 2-storey semi-Ds with amenities and facilities within the township’s commercial components. We believe this project will do well by offering mostly affordable homes within gated and guarded community and are best suited for the upgraders around the matured area. The project is expected to be completed over the next 4-5 years and is targeted for preview in 2H14. So significant earnings contributions will likely be in FY15 onwards i.e. no changes to our FY13-14E estimates.

Net gearing to increase to 0.4x-0.5x by end FY13. Over FY13, the company total land payment obligations amounts to c. RM500m including Bangi, D’sara Sentral and Lakeville. For FY14, land payments will amount to c. RM290m (Senibong, KKCC, MResidence 3 @Rawang). With regards to the new Rawang land, we do not expect any major impact to the net gearing because the land cost is relatively small to its balance sheet. We believe there should be no issues with the land financing given the group’s current low net gearing of 0.22x. So, we expect net gearing to increase to 0.42x-0.47x in FY13-FY14E. This is approaching our comfort ceiling level of 0.5x net gearing, so further sizeable landbanking activities may require new cash-calls in order to keep net gearing within our comfort zone. Nonetheless, the company has already achieved our GDV replenishment target for the year.

FD RNAV increases by only 1% to RM3.20. The GDV of RM520m for this new project only made up about 2% of the total GDV of RM24b. Hence, our FD RNAV increases only by 1% from RM3.17 to RM3.20. However, we are widening our discount factor to 20%* from 4% as we prefer developers with a lighter balance sheet in view of potential tightening measures arising from Budget 2014. So, our TP is lowered to RM2.56 (RM3.04 previously). Maintain OUTPERFORM as the stock still provides potential 26% total returns.

* FD RNAV discount based on 1.64x FY14E PBV @ 4-yr mean levels. Previous discount basis was close to +1.5SD levels.

Note: The first and final dividend of 7.5sen for FY12 will go ex-date on 5 September 2013.

Source: Kenanga