MAHSING’s 1QFY23 earnings exceeded expectations on lower than-expected financing costs. Meanwhile, its property sales are on track to meet our RM2.2b target with a launch pipeline of RM1.5b for the rest of the year. Losses at it glove division narrowed thanks to cost reduction efforts. We raise our FY23-24F net profit forecasts by 21% and 17%, respectively, and reiterate our OUTPERFORM call with an unchanged TP of RM0.70.

Above expectations. 1QFY23 core net profit of RM50.1m came in above expectations, accounting for 31% and 28% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast stemmed from lower-than-expected financing costs thanks to lower borrowings and fixed interest rates (locked in during the pandemic). Strong incoming cash flows upon completion of its existing projects had greatly reduced its reliance for external financing for its upcoming launches and operational needs.

YoY, 1QFY23 revenue surged 49% from increased progress billings from more projects underpinned by higher unbilled sales at the start of the period. Nonetheless, net profit rose by a smaller quantum of 16% due to weaker property development operating margins (-6ppts) from the absence of cost saving recognition registered a year ago. Meanwhile, we highlight that its manufacturing segment (comprising its plastic and gloves division) saw its losses narrowed on cost reduction efforts derived in its gloves division.

MAHSING booked in RM601m of property sales (backed by RM566m worth of new launches) which in on track to meet our and its internal RM2.2b target. For the rest of the year, it intends to launch an additional c.RM1.5b of properties from M Nova, M Minori, M Senyum, Southville and Meridin East. Unbilled sales as of March 2023 stood healthily at RM2.2b to be recognised over for the next three years.

Separately, while its glove division would likely remain loss-making for the subsequent quarters, we foresee losses to narrow on better sales volumes from tighter cost controls, lower input costs (gas prices and nitrile butadiene rubber) and marginally higher ASPs.

Forecasts. After factoring for lower borrowings and interest rates where 71% of its borrowings are fixed (with some tied to low rates of 3.0%-4.9% secured during the pandemic), we raise our FY23-24F earnings forecasts by 21% and 17%, respectively.

However, we maintain our TP of RM0.70 based on an unchanged 65% discount to RNAV, which is at the upper-end of the sector’s average of 60%-65%. This is to reflect its high exposure to high-rises which are currently face a national overhang issue. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

We like MAHSING for:(i) its commendable cash management with net gearing reduced from a peak of 0.37x to 0.20x as of 1QFY23, (ii) appealing lifestyle-focused products at affordable prices providing ease of entry for first-time home buyers, and (iii) quick turnaround strategy for its land banks which helps to minimise land carrying costs. Maintain OUTPERFORM.

Risks to our call include: (i) persistent overhang in the high-rise segment, (ii) widening losses at its glove division due to persistent oversupply, and (iii) sustained elevated inflation and rising interest rates, hurting affordability.

Source: Kenanga Research - 30 May 2023