Review

• Mah Sing’s 1Q24 net profit of RM60.0mn came in within expectations, accounting for 27% and 25% of our and consensus’ full-year forecasts, respectively.

• YoY, 1Q24 revenue declined 13% YoY to RM558.2mn due to lower property development income as more projects were in the early construction stages. Despite this, core net profit rose 20% YoY to RM60.0mn, driven by 1) better property development margins from cost savings on finalised construction contracts, 2) a turnaround in the manufacturing business, with a RM0.6mn operating profit versus a RM3.7mn loss in 1Q23, due to improved glove plant utilisation and cost management, and 3) a lower effective tax rate.

• QoQ, 1Q24 revenue and net profit decreased 17% and 7%, respectively, largely attributed to lower revenue from the property development segment.

• In the first five months of 2024, Mah Sing achieved RM992mn in new sales. The largest contributor was M Zenya, an affordable high-rise project in Kepong, accounting for 28% of total sales. The latest unbilled sales were stabled at RM2.3bn, providing the group with over twelve months of earnings visibility or 1.1x the FY23 property revenue.

Impact

• Maintain earnings forecasts.

Outlook

• We gather that the group's recent launches have consistently shown strong market acceptance, maintaining an impressive uptake rate of over 90%, indicating that the demand for affordable housing in urban areas remains robust. With 5M sales already accounting for 40% of the group's FY24 sales target, we believe Mah Sing is on track to achieve its sales target of at least RM2.5bn.

• Mah Sing's balance sheet remains solid, which as of end Mar-24 saw a low net gearing ratio of 0.06x and a cash balance of RM966mn. Despite acquiring seven new lands since 2023, with an anticipated GDV of RM7.7bn, Mah Sing is actively seeking opportunities to further enhance its landbank in key areas such as Klang Valley, Johor, and Penang. This strategic approach aims to expand the company's residential and industrial development portfolios. Launch of Mah Sing DC Hub @ Southville City with Bridge Data Centres

• Separately, Mah Sing announced that it has partnered with Bridge Data Centres (BDC) to develop a 100 MW data centre (DC) on 17.55 acres of land in Southville City, part of a larger 150-acre site with a planned capacity of up to 500 MW.

• BDC, primarily owned by Bain Capital, is a leading provider of DC solutions in Asia Pacific with operations in Malaysia, India, and Thailand. In Malaysia, BDC operates four DCs: a 5+15 MW facility in Cyberjaya, a 16 MW centre in MRanti Park, Bukit Jalil, and a 126 MW centre in Kidex, Sedenak, Johor.

• For this partnership with BDC, Mah Sing will provide and reserve the 17.55- acre land, while the joint venture (JV) will handle the design, development, and approval processes for the DC facilities and infrastructure. The JV company will be formed with equity participation from both Mah Sing and BDC, with the exact shareholding to be determined later based on contributions. Mah Sing aims for a significant stake, at least 20%, to qualify for equity accounting and will proportionally account for its share of the JV's profits.

• This venture, Mah Sing DC Hub @ Southville City, aims to create a holistic digital infrastructure ecosystem tailored for AI, hyperscale, retail, and enterprise service providers. Located less than 50km from Telekom Malaysia’s new cable landing station in Morib and within 20km of Cyberjaya and Bukit Jalil's DC hubs, it offers strategic connectivity and access to skilled talent from nearby Bangi.

• We are positive about this development as it marks a strategic shift for Mah Sing, diversifying its revenue streams by leveraging its landbank to establish recurring income from DCs, with potential for similar developments at other sites like MSS Business Park in Sepang. With a monthly rent per kilowatt of USD110, the 100 MW DC could generate approximately RM620mn in annual revenue. Assuming a net margin of 20%, Mah Sing's 20% stake in the JV could yield a profit share of RM23.6mn. This amount corresponds to roughly 11% of its FY23 core earnings. Subject to BDC securing hyperscale or AI DC customers, the target commencement of operations is within 12-18 months.

Valuation

• We believe companies in the DC sector are set for stock valuation boosts due to rising demand fuelled by digital transformation. With growing reliance on data-intensive technologies like generative AI, cloud computing and IoT, DC services are in high demand. Their scalable, recurring revenue model and high barriers to entry create competitive advantages, should continue attracting investor interest. Consequently, we value Mah Sing based on SOP valuation, to better reflect the value of the DC business. We value the group’s property and existing businesses at CY25 P/Bk of 1.0x and ascribe a 20x EV/EBITDA multiple to the DC business. We arrive at a new target price of RM2.05 for Mah Sing and maintain Buy on the stock.

• Downside risks to our recommendation in relation to DC investment include: 1) failure to secure offtakers for its spaces, 2) intense competition leading to pricing pressure and reduced margins, and 3) environmental concerns due to significant energy consumption by DCs.

Source: TA Research - 31 May 2024