Mah Sing (Kenanga Research) buy; target price RM2.01

Mah Sing Group
Spot-on 1Q10

• 1Q10 net profit of RM27.9m came within expectations , accounting for 25% each of street’s FY10E net profit of RM113.1m and our RM113.4m. Mah Sing Group (MSGB) recorded 1Q10 sales of RM601m, ahead of its FY10E sales target or 60% of RM1.0b, underpinned mainly by iParc@Bukit Jelutong, Perdana Residence 2, Garden Residence, Cyberjaya and StarParc Point. FY10E sales target will likely be reviewed in 2Q10 depending on additional new launches; to date, MSGB has launched 73% of its FY10E target launches of RM1.0b.

• YoY, 1Q10 net profit grew 23%, driven by strong sales and billings from Southgate, Residence@Southbay as well as on-going projects in Klang Valley (e.g. Kemuning Residence) and JB townships (e.g. Sierra Perdana). However, 1Q10 property operating margins were squeezed 5.5ppt YoY to 21.1% due to higher other operating costs incurred; recall MSGB has a 7% p.a. rental  guarantee scheme with the buyers of The Icon, Jalan Tun Razak (IconJTR) for 3 years; to date, <2% is occupied.

• QoQ, 1Q10 pretax profit of RM41.7m fell 14% QoQ due to the above. Also, previous quarter was higher as there was reclassification of a portion of IconJTR (East Wing) revenue to Other Operating Income, amounting to RM42.7m, due to previous buyer’s forfeiture. However, 1Q10 net profit was an 11% QoQ increase to RM27.9m due to more normalized effective tax rates of l Maintain FY10-11E net profit of RM113.4m-RM141.0m . Unbilled sales is at a new high of RM1.1b, providing >1 year earnings visibility. Our estimates already
assumes 50% -75% IconJTR occupancy for FY10-11E while MSGB bears the balance based on assumed 7% p.a. rental rate; hence increase occupancy will be a bonus booster for  margins.

•  Reiterate BUY with RM2.01 fair value based on FD SoP RNAV. Investors should take advantage of recent price weaknesses to accumulate as we expect MSGB to continue its  aggressive landbanking and quick-turnaround strategy which provides stronger positive news flow, low land holding cost and greater earnings growth of 22% 3-year CAGR. MSGB has been resilient in light of market’s recent sell-downs with +1.8% Ytd-returns vs. KLPRP index of -7.1%; inclusion into the MSCI Global Small Cap Indices for Malaysia which raises its
visibility significantly.