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Mah Sing (CIMB Research) maintain outperform; target price RM3.30

• Maintain OUTPERFORM. Mah Sing is continuing with its aggressive and transformational landbanking exercise that should catapult it into the big league. We believe it is ripe for a major re-rating given its excellent track record in execution and  wildly successful “quick turnaround” model. We are raising our FY11-12 FD EPS by 1-3% as contributions from its recently acquired landbank should more than offset the dilution from the convertible bonds. Our target price is raised from RM2.35 to RM3.30 as we now value the stock at our target market P/E of 14.5x instead of a 20% discount in view of its strong EPS CAGR of 31% and robust landbanking newsflow. Mah Sing is now our top pick in the property sector. We maintain our OUTPERFORM rating given the catalysts of 1) accelerating earnings, 2) strong landbanking newsflow, and 3) record sales in 2010/11.

• Aggressive landbanking. 2010 was a major milestone for Mah Sing as we estimate that it sold RM1.5bn-1.6bn worth of properties, second only to the market leader SP Setia. 2011 is likely to be even better as Mah Sing is gunning for RM2bn-2.5bn sales and the acquisition of significantly more landbank than the RM4bn GDV worth of landbank acquired in 2010. More importantly, the group is eyeing major township landbank in the Klang Valley that would enable it to leapfrog into the big league, making the company too big for investors to ignore.

Quiet transformation in 2010


2010 was a watershed year for Mah Sing as the group quietly underwent a major transformation from a smallish developer with a smattering of niche projects into one to be reckoned with. It snapped up 10 parcels of land in the major property markets of the Klang Valley, Johor and Penang at a cost of RM757m and with a combined GDV of RM4bn. This is a feat that no other developer beat last year and exemplifies the group’s excellent ability to identify prime landbank that is ripe for immediate launch. The RM4bn figure is also very significant in that it effectively doubled the group’s undeveloped GDV, not counting the recent enhancement of Icon City’s GDV from RM838m to RM3bn. Despite the robust newsflow during the year, Mah Sing’s share price lagged behind its larger peers such as SP Setia (see Figure 2). In fact, over a 2-year horizon, Mah Sing has been one of the biggest laggards, ahead of only KLCC Prop (KLCC MK; Underperform) which is not even a developer.

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Although the group’s landbanking prowess is not new given that it is a pioneer in the “quick turnaround” development model (see Figure 3), the number and value of acquisitions in 2010 have taken all by surprise. It is also an indication of the group’s big ambitions and its intention to be a top Malaysian developer in the near future. This is nowhere clearer than in its actual achievements in terms of sales. The group is estimated to have sold RM1.5bn-1.6bn worth of properties in 2010, more than double 2009’s RM727m. Even more impressive is the group’s lofty sales target of RM2bn- 2.5bn for 2011. To put this into perspective, Mah Sing’s sales in 2010 amounted to twothirds of market leader SP Setia’s RM2.3bn sales in FY10/10. Mah Sing’s 2011 sales target is 67-83% of SP Setia’s RM3bn target in FY11. We believe Mah Sing can meet its targets as it has several large projects lined up including the RM3bn Icon City in Petaling Jaya, the RM920m M City in Jalan Ampang, Kuala Lumpur, and the RM800m Feringghi Residence in Batu Feringghi, Penang.

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2011 to be watershed year?


The main implication of its big success in sales is that it will lift the group’s profits correspondingly. The record sales in 2010 and probably even better sales in 2011 point to an acceleration of earnings growth given that the profits will be progressively recognised over the next 2-3 years. But in order for sales to continue climbing over the longer term, Mah Sing needs fuel to sustain that growth, which means that it will have to keep buying larger landbank. Its current landbank of 770 acres with a GDV of RM10bn can last for 4-5 years. This explains Mah Sing’s announcement of a cash-raising exercise in Sep 2010 via the issue of RM325m convertible bonds even though the group had a healthy net cash pile at that time. We believe that Mah Sing will use the proceeds of its bond issue to ratchet up its landbanking, possibly to 2-3x what it achieved in 2010. The bond issue will raise Mah Sing’s cash hoard to over RM600m. Net gearing will still be a healthy 0.2x.

Our earlier forecasts did not factor in the three most recent landbank acquisitions or the dilutive effect of the convertible bonds as one should offset the other. However, given
the buoyant property market, Mah Sing’s strong marketing prowess and the company’s aggressive launch schedule, we believe that earnings contribution from new projects in 2011 should more than compensate for the convertible bonds dilution. As a result, we are raising our net profit forecasts by 14% to RM170m for FY11 and RM213m for FY12.
Fully diluted EPS is also raised by a lower 1-3%. We believe Mah Sing is on an accelerated growth path as its earnings should take off on the back of its successful sales achievements.

As Figure 6 shows, since 2002, Mah Sing has consistently registered improved profits, even during the 2008/9 global financial crisis. Nearly all other developers suffered sharp earnings declines, if not losses, during that difficult period as raw material costs surged in 2008 while demand collapsed in 2008/9. With its aggressive landbanking plans, Mah Sing’s earnings growth should be sustainable even in the longer term. The group is looking for a large tract of land for township development in the Klang Valley that will help propel it into the big leagues, not unlike what SP Setia did 8-9 years back with the acquisition of the mammoth 3,930-acre North Hummock land that has been developed into the resoundingly successful Bandar Setia Alam.

Valuation and recommendation


Mah Sing has come a very long way since it ventured into property development in a big way in 2000. Some may recall that Mah Sing started off as Malaysia’s largest plastic
injection moulding company. It is one of the very few companies that have diversified successfully beyond their original businesses. Mah Sing has succeeded spectacularly in the ultra-competitive property sector, thanks to management’s sheer hard work and passion to grow and succeed. In fact, in our ranking of property stocks in terms of management dynamics and SWOT analysis, Mah Sing is second only to market leader SP Setia (see Figures 9 and 10). This is a very significant feat as there are many far more established developers with landbank purchased at a fraction of today’s cost. Mah Sing has had to work much harder than most other developers due to its lack of landbank and smaller size. But we believe it is on the cusp of another major leap forward, both in terms of size and profitability as it has laid the foundations for strong longer-term sustainable growth through aggressive landbanking complemented by its strong marketing capabilities. We also believe Mah Sing’s share price is ripe for a major re-rating in line with its solid fundamentals.

We are raising our FY11-12 FD EPS by 1-3% after factoring in contribution from recently acquired landbank which more than offsets the dilution from the convertible bonds. Despite the 14% net profit upgrade, we believe there is further upside as we have not factored in any contribution from overseas projects or potential new landbank.
The earnings upgrade lowers our CY12 FD P/E to 9.7x, a steep 27% discount to the market. We are also raising our RNAV estimate from RM1.99 to RM2.52 after increasing the land value of the Icon City project from RM200 psf to RM500 psf in view of the recent massive increase in GDV from RM838m to RM3bn. Based on its last traded price, Mah Sing is trading at a 14% discount to its FD RNAV.

In view of the group’s excellent track record in execution and wildly successful “quick turnaround” model, we are increasing our target price from RM2.35 to RM3.30 as we now tag our target market P/E of 14.5x to the stock instead of a 20% discount to our previous target market P/E of 13.8x. The removal of the discount is justified in view of the group’s strong 3-year EPS CAGR of 31% vs. the market’s 17% and robust newsflow on landbanking. Our target price works out to a 30% premium over RNAV, in line with SP Setia’s target premium. Our revised target price offers investors 51% upside to Mah Sing’s share price. Given the significant share price price and promising prospects, Mah Sing is now our top pick in the property sector. We expect the company to undergo a transformational re-rating that will narrow the market cap gap with some of its larger peers. We continue to rate the stock an OUTPERFORM. Potential re-rating catalysts include its 1) accelerating earnings trajectory, 2) strong landbanking newsflow and 3) record sales in 2010/11. For investors who want a leveraged exposure to the stock, there are two call warrants that are in the money (Figure 11).


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