MAHSING has announced a joint venture agreement with its longtime Indonesian plastics distribution partner. The JV seeks to synergise MAHSING’s manufacturing capabilities with its partner’s wide distribution network to better penetrate the growing plastic pallets market in Indonesia. However, the venture may not be a meaningful contributor to group’s earnings in the near term. Maintain OUTPERFORM and TP of RM1.00.

JV with Indonesian partner for more than 10 years. The group is setting up a joint venture with PT Gaya Sukses Mandiri Kaseindo (PT Gaya) to jointly engage in the manufacturing and trading of plastic pallets, containers, and related material handling and storing products in Indonesia. The JV will be operated with a 70% ownership by MASHING and the remaining 30% by PT Gaya. This is intended to enable the group to dedicate its efforts in expanding its production capacities in Indonesia while relying on PT Gaya’s expertise in tapping into its wide existing distribution network there. We gathered that PT Gaya does not have an existing plastics manufacturing facility to support the abovementioned JV.

Overall positive but near-term accretion could be minimal. We are positive on the deal as it allows MAHSING to tap into a growing market opportunity, especially with Indonesia expected to see strong economic prospects in the near term. That said, we do not expect meaningful contributions from the segment in the near-term as it is perpetuated by losses, dragged by the group’s glove division.

Forecasts. Maintained.

Valuations. We keep our TP of RM1.00 based on an unchanged 50% discount to RNAV, which is below the industry’s average of 55%. This is to reflect its significant exposure to the affordable high-rise segment which we believe will benefit due to higher interest rate and taxes crimping affordability in other residential types, and commercial segments that are highly sought after currently. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We like MAHSING for: (i) its efforts to keep its net gearing ratio in check, with a 3QFY23 reading of 0.13x being the lowest, compared to 0.34x in 2QFY22, (ii) lifestyle-focused products providing ease of entry for first-time house buyers, and (iii) sound land bank management turnaround which minimises carrying costs. That said, MAHSING is still relatively heavily exposed to high-rise residential properties which will continue to be in a state of overhang in certain regions. Maintain OUTPERFORM.

Risks to our call include: (i) the overhang in the high-rise segment persists, (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 - 24 Jan 2024