Mah Sing 3Q profit rises 10% y-o-y

Downgrade hold call with a target price (TP) of RM1.60: Mah Sing Group Bhd’s third quarter of financial year 2016’s (3QFY16) core net profit (excluding distribution to perpetual sukuk holders) rose 10% year-on-year (y-o-y) as gross margins improved 1.3 percentage points to 26%. On top of that, its administrative and other operating expenses fell 30% y-o-y to RM45 million. Mah Sing did not propose a dividend in the quarter, as it typically proposes only a final dividend during its 4QFY16 results announcement.

Mah Sing sold RM632 million worth of properties in 3QFY16, bringing its cumulative nine months period of FY16 (9MFY16) sales to RM1.4 billion. Sales rebounded strongly in 3QFY16 as they improved 75% quarter-on-quarter (q-o-q). However, the recovery was insufficient to make up for the lull in the first half of FY16. The group cut its full-year sales target by 22% to RM1.8 billion from RM2.3 billion. Based on the revised target, it now expects 4QFY16 sales to decline by almost 40% q-o-q to only RM400 million and full-year sales to decline 22%. As at September 2016, Mah Sing’s unbilled sales stood at RM4 billion, 6% down q-o-q.

Mah Sing’s RM1.4 billion sales in 9MFY16 were still commendable as it launched only RM984 million worth of properties in this period. However, we expect it to turn more cautious in the near term. It said buyer interest for its properties was strong, but the conversion of bookings into sales in the recent weeks was below expectations. Until Mah Sing sees an improvement in the conversion rate, we expect it to be more wary than usual about its new launches. This could adversely affect its near-term sales.

Including dividend, the return on the stock has outperformed that of the FBM KLCI by 10% year to date. We downgrade the stock to “hold” as the weak sales outlook in the near term could cap its share price upside. Our target revised net asset value discount for Mah Sing is now 30%, larger than the 20% discount attached to Eco World Development Group Bhd (EcoWorld) and UOA Development Bhd’s valuations as we believe these two peers are on track to beating their FY15 sales.  The key upside or downside risks to our call are better- or weaker-than-expected sales.

There is a pause in sales recovery in which most developers that we cover are expected to deliver strong q-o-q sales growth in 3QFY16, driven by more new launches for the mass-market homebuyers. However, the recent turn of events, ranging from uncertainties about US economic policies and the volatile exchange rate movements, would have a negative impact on homebuyers’ sentiments.

We believe that mass-market housing will continue to be the focus of most developers in 2017. Those that have lined up major launches of mass-market housing projects for next year, in our view, offer the highest chance of sustaining, if not beating, their 2016 sales in 2017. In our coverage, these developers are EcoWorld (ECW MK, “add”, TP: RM1.75) and LBS Bina Group Bhd (LBS MK, “add”, TP: RM2.15). — CIMB Investment Research, Nov 27

This article first appeared in The Edge Financial Daily, on Nov 29, 2016. Subscribe to The Edge Financial Daily here.