News  MAHSING announced that they have completed the issuance of RM540m nominal value unrated perpetual Sukuk by way of private placement. It carries a periodic distribution rate of 6.8% p.a. (semi-annual payments). There is no fixed maturity date but is callable 5 years from the date of issuance at its nominal value. Note that the bond is also not convertible.

 The rationale of the proceeds is mainly for investments, working capital and/or refinancing of existing borrowings.

Comments  We were pleasantly surprised by the announcement as we had earlier hoped that the group consider such financing options to beef up their balance sheet in view of: (i) the challenging property sector, and (ii) potential opportunity for landbanking deals. We had highlighted in our previous sector report (30/12/14) that landbanking opportunities tend to arise during challenging times and developers get prepared for such opportunities.

 To recap, the group has recently completed its rights issue with free warrants to raise RM630m, which would bring our estimated FY15E net gearing to 0.27x. Adding the perpetual bond amount, the group has raised a total of RM1.17b in fresh funds, which would pare our estimated FY15E net gearing further to 0.06x. This is a comfortable level, especially if the group wants to landbank aggressively.

Outlook  While we laud the company for readying themselves for landbanking opportunities, the sector remains challenging due to tight lending liquidity and buyers’ ‘wait-and-see’ attitude. This is even before the implementation of GST, which begins today! Thus, we opt to take a conservative view on the sector until we can confidently posit that the sector’s downside risks are fully priced-in.

 The 1-for-4 bonus issue will likely be completed in 3Q15.

Forecast  The impact of the interest arising from the perpetual bond (recognized as part of MI), will lower FY15-16E earnings by 7.0%-9.0%. We believe that the group will use this to pare down their existing borrowings, which will result in better project margins. Taking this into account, our FY15-16E earnings are only lowered by 1.0% and 3.0%, respectively.

Rating Maintain MARKET PERFORM

Valuation  No changes to our ex-bonus TP of RM1.74 based on 48.0% discount to its ex-bonus FD RNAV of RM3.35. Applied RNAV discount rate is closer to our sector average of 50.0%.

 Our recommendation is inline with our NEUTRAL call for the Property Sector. Downside risk is somewhat protected by being a highly institutionalized sector laggard and while FY14-15E yields are higher at 3.9% each vs. big cap developers’ yields which are typically below <3.0%.

Risks to Our Call  Weaker-than-expected property sales.

 Higher-than-expected sales and administrative costs.

 Negative real estate policies.

 Tighter lending environments.

Source: Kenanga