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Mah Sing makes strategic switch to affordable housing

Mah Sing Group Bhd (Oct 6, RM1.77)
Maintain underperform at RM1.80 with revised fair value of RM1.55 (from RM1.47):
Mah Sing announced that it has entered into a shares sale agreement to acquire the entire stake in Semai Meranti Sdn Bhd for a total purchase consideration of RM92 million (out of which RM35 million is the liabilities in the company).

Semai Meranti is the beneficial owner of a piece of freehold development land (with development order) in Rawang measuring 225.7 acres (90.28ha). Therefore, the price tag translates into a land cost of RM9.36 psf, which is reasonable for a large tract of residential land in a suburb 30 to 40km outside Kuala Lumpur city.

We are positive on the acquisition. The land will be developed into a self-contained township named M [email protected], offering entry level homes priced from RM390,000, townhouses, semi-dees, 3-storey shops and other amenities. Gross development value (GDV) is estimated at RM948 million, with a development period of three to four years.

The pricing is in line with the property prices in nearby areas — RM430,000 for a 20' x 75', built-up of 1,800 sq ft terrace in Emerald West against RM390,000+ for 22' x 70', built-up of 2,000 sq ft in M Residence. We believe the key selling points for the township will be: (i) the Jusco Shopping Centre, which is just 5km away and expected to be completed by end-2011; and (ii) good accessibility via the North South Highway and KL-Kuala Selangor Expressway.

M Residence will be able to capture the upgraders from Batu Arang, Kundang, Kuang and Sungai Buloh. The project is expected to be launched in 1H12, as soon as the transaction is completed in 1Q12.

As at Sept 15, Mah Sing has secured RM1.74 billion worth of property sales, on track to meet its full-year sales target of more than RM2 billion. The bulk of the sales is contributed by high-end projects launched previously.

While Mah Sing is now switching to the affordable segment, the remaining outstanding projects such as Icon City PJ (GDV RM3.2 billion), Icon Residence Mont'Kiara, M-City and M-Sentral are likely to experience some overhang in view of slower economic growth next year. The risks are: (i) rising building material costs; (ii) competition from peers; and (iii) country risks.

Earnings from M Residence are expected to kick in only from FY13, raising our earnings estimate by 4.8%. After imputing the incremental net present value into our realisable net asset value estimate, our fair value is raised to RM1.55 (from RM1.47), based on an unchanged 35% discount to RNAV.

While the switch to affordable housing is welcome, we believe the volatile downtrend in the equity market does not support a high-beta cyclical property play. We therefore maintain an "underperform" call on Mah Sing. — RHB Research, Oct 6

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