Despite 9MFY20 coming in below expectations, we remain optimistic on FY21 prospect which should see both its traditional divisions (i.e. property and plastic) and new division (glove) contribute strongly towards bottomline, lifting earnings higher than pre-pandemic levels. Adjust FY20E/FY21E earnings lower by 32%/5% but maintain OP on unchanged SoP-derived TP of RM1.05.

Below expectations. 3QFY20* CNP of RM23.2m brought 9MFY20 CNP to RM37.4m – below our/consensus expectations, accounting for 63%/42% of full-year estimates. The negative deviation stems from weak property contributions attributable to: (i) lower-than-expected margins from recently launched developments, and (ii) weaker-than-expected rebound post MCO. No dividends declared as expected.

*We derive our 3QFY20 CNP after reversing out: (i) RM5.5m insurance income  from a fire that broke out at its Plastic division in 2QFY20, (ii) RM1.7m allowance  of impairment for property inventories and financial assets.

Sales inline. 3QFY20 sales of RM428m (+149% QoQ; +14% YoY) lifted 9MFY20 sales to RM847m (-25% YoY) – in line with our/management’s target of RM1.1b. The strong sales this quarter were backed by new launches worth RM1.1b mainly at M Luna, M Adora and M Centura/Arisa which received tremendous interest given the appealing price points. For the remainder of 4QFY20, management intends to launch 2 more linked- homes development worth RM250m at M Aruna and Meridin East; bringing total FY20 launches to c.RM1.4b, slightly lower than their intendedvFY20 launch target of RM1.5b.

Highlights. 3QFY20 CNP of RM23.2m surged 8.3x QoQ from a rebound in performance at its Plastic and Hotel divisions coupled with the absence of a perpetual sukuk distribution worth RM27m made in 2QFY20. That said, we note that property division actually fared worse QoQ due to recognition of lower margin property mix leading to a 6ppt dip in PBT margin. YoY, 9MFY20 CNP of RM37.4m plunged 59% as a result of the Covid-19 lockdowns which saw all business divisions recording weaker pre-tax levels on the back of lower revenue.

Reintroduction of CMCO on Oct 14th have minimal impact on property sales and construction progress according to management. Thus, we expect 4QFY20 operational performance to be similar as 3QFY20 level – with PAT (before sukuk payment) to be c.RM25-30m. Nonetheless, expect the scheduled RM27m payment to sukukholders in 4QFY20 to drag CNP. Meanwhile, construction for its glove factory is as scheduled and operations is on track be live by April-21.

Lower FY20E/FY21E earnings by 32%/5% after accounting for a weaker rebound in FY20 and lower margins for newly launched developments i.e. M Vertica, Centura, Luna, Adora.

Maintain Outperform with unchanged SoP-TP of RM1.05. As we teeter between (i) a recovery narrative given the vaccine breakthrough and (ii) elevated new Covid-19 cases in the immediate term; we believe Mahsing’s positioning for FY21 is ideal – they get to ride earnings rebound from its property front while new stream of glove earnings from elevated glove prices will cascade strongly towards bottomline, propelling profits above pre-pandemic levels.

Source: Kenanga Research - 1 Dec 2020