9MFY21 CNP of RM93m is below expectations due to earnings shortfall from its new gloves division on weaker-than-expected volumes and ASPs. Meanwhile, 9MFY21 sales of RM1.28b were inline. Cut earnings by 22%/32% after completely removing glove contributions from our forecast given the severe price competition ahead which could be challenging for a new comer. Maintain MP with lower TP of RM0.75 based on 0.51x group PBV (from RM0.85).

Below expectations. 3QFY21 CNP of RM40m led 9MFY21 CNP to RM93m – below our/consensus expectations at 68%/62% of full-year forecast. The negative deviation came mainly from weaker-than- expected contributions from its maiden glove division due to shortfall in volumes and ASPs. Our channel checks reveal that ASPs are now hovering at USD30/1,000 pieces (for Nov/Dec delivery) versus our FY21-22E ASP assumption of USD45-35 per 1,000 pieces. No dividends as expected.

Sales in line. Meanwhile, 3QFY21 sales of RM479m led 9MFY21 sales to RM1.28b – in line with our/management’s target of RM1.6b. These sales were backed by launches worth RM1.18b in 9MFY21 and management targets another c.RM0.4b launches for 4QFY21.

Highlights. 3QFY21 CNP of RM40.2m improved 202% QoQ, mainly due to the absence of RM27.1m perpetual securities distribution payable every 2Q and 4Q. Ignoring this distribution for comparison purposes, earnings would actually come in flat despite revenue decreasing 17% due to better margins at its property arm as there were cost savings upon account finalisation for project completed recently. Meanwhile, we note that revenue contribution from gloves1 remains insignificant during the quarter (2QFY21 glove revenue was <RM8m). In fact, its gloves division had incurred a loss due to the lack of economies of scale. YoY, 9MFY21 CNP leapt 1.5x on higher revenue (+15%) as 9MFY20 was bogged down by a more stringent MCO 1.0.

New land in Batu Caves. Alongside the results, Mahsing announced an 8.09ac leasehold land acquisition at Batu Caves for RM95m, earmarked for a RM790m GDV high-rise project (2,100 units) – implying an attractive land/GDV ratio of 12% (typically 15%). This is Mahsing’s third land acquisition of the year.

Gloves venture not living up to potential. Based on four working lines as of end-June, potential glove production/month (assuming they are efficient) is at 100m pieces/month. Consequently, this brings total potential glove production in 3QFY21 to 150m pieces (assuming 1.5 months’ lockdown during the quarter). However, our analysis2 indicate that Mahsing has at most only sold 62.5m pieces during the quarter – a far cry from the potential 150m pieces. This discrepancy indicates either (i) a lack of demand or (ii) inability to produce efficiently due to teething issues. Note, Mahsing’s maiden line was commissioned in May 2021.

Given the non-existent glove contributions currently coupled with a challenging outlook ahead which could stymie future profitability of this new segment, we have completely remove glove earnings from our estimates. Hence, FY21-22E earnings are reduced by 22-32%. Note, the glove division was projected to contribute RM33m-58m in FY21-22 previously.

With the removal of gloves earnings, we revert valuations back to PBV from SoP. Consequently, TP is lowered to RM0.75 (from RM0.85) based on FY22E PBV of 0.51x (-0.5SD from mean). MP maintained. The 0.51x PBV valuation is within the 0.3-0.7x PBV targeted range ascribed to developers under our coverage.

Source: Kenanga Research - 1 Dec 2021