News

MAHSING announced that they will not be going ahead with the Seremban land acquisition and they have sent a letter to the vendors that the SPA is void and rescinded due to misinterpretation and breach of the T&C by the vendors. The group is demanding for a refund, i.e. 10% of its deposit or RM35.96m with interest earned. Recall that the group proposed to acquire 960ac freehold land in Mukim Rantau, Seremban for RM359.6m (RM8.60psf) back in Aug-14, which was meant to be funded by its subsequent rights issuance. The project has an estimated GDV of RM7.5b.

Comments

We are not surprised by this news as it was announced that MAHSING has 7 individuals initiating legal suites against them over the proposed acquisition recently, which follows an earlier news that there was a caveat lodged, which was not found prior to the signing of the SPA. Clearly, the land deal has gone sour and it would be wise for the group to give this land a miss.

We also view this as a ‘blessing in disguise’. Recall that in June-2015, the Negeri Sembilan state government had:(i) increased the Bumiputera ownership quota to 50% from 30% previously, and made a ruling that (ii) 50% of every new housing project must consist of affordable houses (15% must be priced at RM80,000 and below, another 15% at RM250,000 and below and 20% at RM400,000 and below). Considering such constraints, we reckon it will take MAHSING a lot longer to realize the project value than previously expected and it would have faced margin squeeze.

Removing the Seremban land deal from our FD RNAV will lower it by 6% to RM3.14 while our FY15/16E net gearing will be reduced from 0.07x/0.13x to -0.03x/0.02x. We believe the group will be looking to utilize the RM107.2m funds from rights issue which was earmarked for this deal for other land banking opportunities.

Outlook

We may review our FY15E sales of RM3.3b (management’s target: RM3.4b) during its upcoming quarterly results as the property market continues to be very weak. However, we prefer to wait for more clarity from management before trimming our target. Note that a 10% reduction in our sales estimates will result in c. 8% reduction in our FY16E earnings (FY15E will not be significantly affected due to past projects billings).

Forecast

No changes as we had factored in significant earnings contributions from the Seremban land from FY17 onwards.

Rating

Maintain MARKET PERFORM

Valuation

Lowering TP by 6% to RM1.64 based on unchanged 48% discount to its reduced FD RNAV of RM3.14. Our applied RNAV discount is close to our big cap developer’s average of 52%. Although the stock is trading near trough valuations of 9.1x-8.5x FY15-16E PERs, sector dynamics are capping near -term upsides. Positively, downside risk is somewhat minimised by it being a sector laggard, and highly institutionalized shareholding, while FY15E yield is slightly higher at 4.5% vs. big cap developers’ range of 3.1% (except UOA whose yield is 7.0%).

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 Research - 17 Aug 2015