KUALA LUMPUR (Oct 16): Mah Sing Group Bhd rose among the top active stocks on Bursa Malaysia in the morning trading session following news of its glove business venture.

At 10.11am, shares in Mah Sing had jumped as much as 27.59% or 20 sen to 92.5 sen, bringing its market capitalisation to RM2.25 billion. The stock saw some 235.77 million shares traded.

Year to date, the stock jumped 30% from when it was trading at 71 sen apiece. 

Analysts covering the stock have maintained their ‘buy’ call on Mah Sing as they are positive on the group’s diversification effort into the glove business and said it will boost Mah Sing’s earnings significantly going forward.

RHB Investment Bank Research analyst Loong Kok Wen said the new business should add resilience to the cyclical earnings from the property development.

“Earnings next year will likely see a quantum leap as earnings from the glove business start to kick in. We raise our FY21F22F earnings by 56% and 126%.

“Based on management’s guidance on ASP [average selling price] of USD80-160 and cost of USD25-27/box of 1,000 pieces, we estimate that FY21F-22F net earnings to be topped up by roughly RM100 million and RM230 million, contributing 37%-56% of the group’s total earnings,” she said in a note today.

The analyst raised Mah Sing’s target price to RM1.28 (from 91 sen) , 75% upside and circa 3% yield.

For valuation, she added: “We see Rubberex Corp Bhd (Buy, TP: RM6.60) as the closest comparable peer given similar production capacity. Our SOP [sum-of-parts] valuation comprises 75% discount to RNAV [realisable net tangible assets] (raised from 65% given the recent surge in COVID-19 cases which has hit property market sentiment again), 12x P/E for plastic manufacturing division, and 15x for the glove business”.

Hong Leong Investment Bank (HLIB) Research analyst Andrew Lim Ken-Wern said the proposed diversification would enable Mah Sing to take advantage of the glove business with positive long-term industry prospects and additional demand from the Covid-19 outbreak.

Ideally, Lim said the group would be able to tap onto its expertise of its regional plastics business in order to synergize with this potential venture.

“We keep our forecasts unchanged for now, pending further solidification in the plans. We note a potential upside to our FY21/FY22 earnings forecasts,” he said.

Lim said the target price for Mah Sing was unchanged at 85 sen based on an unchanged discount of 60% to a RNAV of RM2.14.

“Our buy call is premised upon its commendable take-up of recent launches, cover ratio of 1.1x to provide earnings visibility coupled with the positive sentiment associated with their foray into gloves. We see value in the stock as it is priced at a P/B valuation of 0.5x (-2SD of its 5-year mean), and is lower than its GFC trough of 0.68x,” he added.

Besides providing an additional earnings stream to Mah Sing, MIDF Research analyst Jessica Low Jze Tieng said this allows the group to ride on the rising demand for gloves due to Covid-19 pandemic.

She said, the group’s new venture into gloves manufacturing is not expected to impact financial year ending Dec 31, 2020 (FY20) as gloves production will commence in 2QFY21.

“Nevertheless, earnings contribution from gloves manufacturing is expected to more than double Mah Sing’s earnings in FY21 as Mah Sing targets to sell gloves at spot order price which is much higher than contractual price. We estimate gloves manufacturing to contribute earnings of more than RM150 million for FY21 based on conservative spot order price of US$60/thousand pieces against current spot order price of US$80-US$160 per thousand pieces.

“In a nutshell, we are raising our FY21 earnings forecast by 152% to RM266.5 million after inputting earnings contribution from gloves manufacturing,” she said.

Low said MIDF revises its target price for Mah Sing to RM1.10 from 82 sen as it changes its valuation method to SOP from RNAV to better reflect value of Mah Sing with significant contribution from property and gloves segment.

“Besides, we think that Mah Sing’s venture into gloves manufacturing could attract investors who would like to invest in gloves companies as valuation of Mah Sing is undemanding by trading at PE ratio of 5x at FY21 EPS compared to higher valuation of bigger gloves makers,” added Low.

 

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