Mah Sing Group Bhd
(Jan 20, RM1.90)
Maintain buy at RM1.90, target price raised to RM2.50: The company has just officially launched its Garden Residence, Cyberjaya (gross development value: RM690 million) and Perdana Residences 2, Selayang (GDV: RM209 million).
We understand after a company visit that the response to these projects during the private preview was quite encouraging. Garden Residence achieved a booking rate of around 54% (out of 370 units launched since Jan 7), and 87% for Perdana Residence 2 (out of 188 units launched since Dec 1, 2009).
This will translate into about RM320 million of sales to be recognised in 2010-2011. Even industrial project Iparc, Bukit Jelutong (GDV: RM100 million) garnered strong registration of interest, and achieved a booking rate of 78%.
There are more launches in the pipeline, following its aggressive landbank acquisition in 2009. Thanks to Mah Sing’s fast turnaround strategy, projects undertaken are highly cash generative. We expect more projects coming onstream from 2010, with a total GDV of RM2.9 billion.
These projects could contribute to group earnings from as early as 2010, Furthermore, its Ebit (earnings before interest and tax) margin is still resilient at 20%-22% as we understand that not all products offered come with attractive financing schemes which could erode the group’s earnings.
Mah Sing has secured a new buyer, T S Law Realty Sdn Bhd (TSL), for The Icon, Jln Tun Razak, at RM226.5 million (RM816 psf) as the original sale and purchase agreement (SPA) with Prompt Symphony Sdn Bhd (PS) for RM237 million (RM852 psf) has been terminated.
There should be no earnings reversal for Mah Sing as the new SPA with TSL and the forfeited deposit by PS (RM42.7 million) totalled RM269.2 million, slightly higher than PS’ SPA consideration of RM255 million (inclusive of RM18 million from 301 carpark lots).
Mah Sing plans to offer a 7% annual rental guarantee for three years for The Icon commencing from the actual vacant possession date, which shall correspond with the date of the SPA. This will translate into a yearly rental payout of RM15.9 million, equivalent to a monthly rental of RM4.75 psf.
We think Mah Sing should not have any difficulty leasing out the space at such attractive rates (Grade A office rental rates in the area is currently at RM5-RM5.50). However, we are concerned over the group’s ability to secure full tenancy within a short span of time.
We are positive on the group’s venture into China as it provides another key earnings driver to the group. Furthermore, we think management is prudent, having a Chinese party to co-develop the project as it is still new to China’s property market.
To recap, Mah Sing entered a letter of intent (with a 51% stake) with Danlong Realty (Beijing) Ltd to jointly develop a medium-to-high-end mixed development on 87.3 acres of land in Wujin District, Changzhou City, with an estimated investment cost of US$620 million (RM2.1 billion).
Assuming a 20% pre-tax margin and project lifespan of five years, the project could deliver RM38.6 million yearly profits to the group. However, we have not factored in earnings from this project in our forecasts as the project is still at preliminary stages.
We raise our 2010 and 2011 net profit forecasts by 7% and 14% respectively, factoring in new project launches such as: a) the Garden Residence, Cyberjaya, b) Perdana Residence 2, Selayang, and c) iParc, Bukit Jelutong.
We maintain buy with a revised target price of RM2.50 (previously RM2.30). Our new target price values Mah Sing at 12.1 times 2011F price earnings (PE), reflective of mid-cycle valuations, as well as the group’s asset-light and quick turnaround business model. — UOB Kay Hian, Jan 20
This article appeared in The Edge Financial Daily, Jan 21, 2010.
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