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Mah Sing Group (Kenanga Research) buy; target price RM2.20

Mah Sing Group
3 more land acquisitions of GDV RM1.1b


Acquiring 3 more landbanks worth a combined GDV of RM1.1b. Mah Sing Group (MSGB) increases its total landbank by 27% to 789ac by acquiring 3 parcels of land; residential land in Kinrara (125.8ac; RM33psf), commercial land in Pekan Baru Subang along Jln Sungai Buloh (17.82ac; RM85psf) and land in Bukit Jelutong Business and Technology Park for industrial development (10.95ac; RM67psf). We opine that the prices are fair for each acquisition, when compared to latest transactions and current asking prices. (Project details and maps below ).

Total future revenue up by 18% to RM7.5b, improving earnings sustainability to 6-7 years from 5-6 years, inclusive of RM1.1b unbilled sales (at 31/3/10). We are comforted by MSGB’s proactive management in replenishing its GDV given rapid launches and swift sales. Replenishing township developments via Kinrara project is a plus as MSGB’s existing township landbanks depletes ; mass market provides steady cash flow and tends to be ‘self-financing’.

Land acquisitions amounts to RM276.2m , funded by internally generated funds and borrowings. The balance sheet is healthy (0.05x net gearing, 0.24x gross gearing, RM169m cash balance at 31/3/10). MSGB is comfortable to gear up to 0.5x net gearing which is potential RM392m new financing, implying possible total cash pile of RM561m or more than sufficient to meet its land repayment obligations.

New project sales likely to outperform again. All 3 projects are in matured areas with high population catchment, ample accessibilities and large upgraders market since there are few new developments in these areas.

Slight upward revision to FY11-12E net profit by 1%-2% to RM142.0m (+25% YoY) - RM171.1m (+21% YoY). FY10E net profit of RM113.4m (+20% YoY) remains unchanged as significant contributions from the 3 projects will be felt from FY11 onwards. Although the 3 new projects brings -in substantial future revenue, MSGB intends to pace its other project launches to achieve steadier 20%-25% YoY growth over a longer period, oppose to sharp >25% growth over a shorter term.

Reiterating BUY with higher fair value of RM2.20 (previous RM2.01) based on FD SoP RNAV as we incorporate the 3 new projects. We continue to like MSGB for its aggressive landbanking and quick-turnaround strategy which provides stronger news flow, low land holding cost, its goal to maintain sustainable strong earnings growth (22% 3 CAGR) over longer periods and better than average dividend-yr gross yields of 4.4% -5.5% for FY10-11E assuming 41% -40% net payout.

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Key Points

Acquiring 3 more landbanks worth a combined GDV of RM1.1b. Mah Sing Group (MSGB) increases its total landbank by 27% to 789ac by acquiring 3 parcels of land; residential land in Kinrara (125.8ac; RM33psf), commercial land in Pekan Baru Subang along Jln Sungai Buloh (17.82ac; RM85psf) and land in Bukit Jelutong Business and Technology Park for industrial development (10.95ac; RM67psf). (Location maps at end of report).

Note the acquisition of the Kinrara land is from Mahajaya, the same vendor as the first Kinrara parcel acquired a week ago (refer to commentary in Kenanga Today dated 6 July 2010), and the entire Kinrara land acquired is earmarked for the ‘Residence’ branding. Increase in total landbank by 27% includes recent Kinrara Residence land of 13.2ac bought from Mahajaya.

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We opine prices are fair for each acquisition, when compared to latest transactions and current asking prices.

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New project sales likely to outperform again. All 3 projects are in matured areas with high population catchment, ample accessibilities and
large upgraders market since there are few new developments in these
areas.

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Total future revenue up by 18% to RM7.5b, improving ear nings sustainability to 6 years from 5-6 years, inclusive of RM1.1b unbilled-7
sales (at 31/3/10). We are comforted by MSGB’s proactive management in replenishing its GDV given rapid launches and swift sales. Replenishing township developments via Kinrara project is a plus as MSGB’s existing township landbanks depletes; mass market provides steady cash flow and tends to be ‘self-financing’. but we would still like to s more sizeable township landbanking (>200ac) to better secure the bread -and-butter portion of MSGB’s earnings.

The increase of 18% in future revenue includes recent RM100m GDV from earlier Kinrara Residence acquisition.

Land acquisitions amounts to RM276.2m, funded by internally generated funds and borrowings; D:E mix will be decided later. Nonetheless, balance sheet is healthy (0.05x net gearing , 0.24x gross gearing, RM169m cash balance at 31/3/10) . MSGB is comfortable to gear up to 0.5x net gearing which is potential RM392m new financing, implying possible total cash pile of RM561m or more than sufficient to meet its land repayment obligations. However, we do not foresee gross gearing exceeding 0.4x in FY10; even nearing those levels, we expect gearing to fall quickly because of 1) its quick turnaround model, where launches happen 6 months after land-9 acquisitions 2) some land repayments are progressive.

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Slight upward revision to FY11-12E net profit by 1%-2% to RM142.0m (+25% YoY) - RM171.1m (+21% YoY). FY10E net profit of RM113.4m (+20% YoY) remains unchanged as significant contributions from the 3 projects will be felt from FY11 onwards. Although the 3 new projects brings-in substantial future revenue, MSGB intends to pace its other project launches to achieve steadier 20%-25% YoY growth over a
longer period, oppos e to sharp >25% growth over a shorter term. To achieve this, we have reduce pace of launches of existing township projects (e.g. Sierra Perdana, Austin Perdana, Sri Pulai Perdana 2, Garden Residence), in addition to incorporating the new projects.

Reitera ting BUY with higher fair value of RM2.20 (previous RM2.01) based on FD SoP RNAV as we incorporate the 3 new projects (refer to SoP RNAV table at end of report for assumptions ). We continue to like MSGB for its aggressive landbanking and quick-turnaround strategy which provides stronger news flow, low land holding cost, its goal to maintain sustainable strong earnings growth (22% 3-yr CAGR) over longer periods and better than average dividend gross yields of 4.4%-5.5% for FY10-11E assuming 41%-40% net payo ut.


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