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Mah Sing Group Bhd
Striking the right chord during Europe roadshow
On track to beat estimates
Although there were no major surprises from our 3-day Europe roadshow with Mah Sing, our positive view on the company is reinforced by the strong sales that it is chalking up and the likelihood that it will soon secure new earnings-accretive landbank. Including bookings, total YTD sales top RM1.2bn, already putting it halfway to its RM2bn-2.5bn sales target for the full year. Mah Sing remains an OUTPERFORM and our top pick in the property sector. Also unchanged is our target price of RM3.30 which is based on our target market P/E of 14.5x. The roadshow reaffirms our strong conviction in the stock. Potential re-rating catalysts include 1) record sales from strong take-up of new large projects, 2) robust newsflow due to aggressive landbanking and 3) increasing investor awareness of Mah Sing’s cheap valuations and transformational moves.
Three destinations in three days
We were on a non-deal roadshow in Europe with Mah Sing’s Executive Director Steven Ng and General Manager Ong Chee Ting for three days, introducing our top pick in the property sector to investors in London, Amsterdam and Edinburgh. Questions by investors centred on the group’s landbanking efforts, the reasons for its success in recent years, prospects for the property sector and operational issues.
Mah Sing reiterated its plans to acquire landbank with RM7bn GDV potential this year. It is expected to cost the group RM1bn, pushing up net gearing from around 0.2x to a still-manageable 0.5x. But if it gets opportunities to acquire more land that would take the GDV beyond RM7bn, it may have to consider ways to keep gearing at a maximum of 0.5x.
Clients were curious to know the secret behind Mah Sing’s spectacular performance in recent years and what response this has drawn from its competitors. The key reasons for Mah Sing’s aggressive and successful expansion in recent years include the big ambitions, hands-on hard work and careful planning by Group CEO Tan Sri Leong Hoy Kum. Mah Sing’s role models include Hong Kong’s Cheung Kong and Singapore’s Capitaland.
Mah Sing is bullish about the outlook for the property sector on the grounds that affordability is strong, government policies are conducive and the MRT project is creating excitement among buyers. Buyers are also viewing properties as a good inflation hedge in view of rising costs. Management brushed aside the concern over rising interest rates’ deflating impact on demand, arguing that historically, demand is more a function of general confidence and employment prospects.
Comments
There were no major surprises from the roadshow. However, our positive view on the company is reinforced by the strong sales that it has chalked up YTD. YTD sales with S&P agreements signed are estimated at RM738m. Another RM536m worth of bookings should be converted into sales soon, which will bring total sales to RM1.27bn, which is the halfway mark for its RM2bn-2.5bn sales target for the full year. In addition, the upcoming maiden launch of its RM3bn Icon City in Petaling Jaya and the RM920m M City project along Jalan Ampang in Kuala Lumpur should easily reap several hundred million ringgit worth of sales each. We believe Mah Sing should have no difficulty meeting its sales target for 2011 and may, in fact, exceed those targets.
We also gather that Mah Sing is working hard to secure additional landbank and may wrap up several parcels sooner than expected. The market should respond positively to this as Mah Sing’s quick turnaround model means that acquisitions are likely to be earnings accretive over a 2-3 year horizon. Mah Sing is eyeing landbank in the Klang Valley, Johor and Penang but its priority is the Klang Valley. Senior management was recently given a tour of the MRT alignment to identify potential land for acquisition. While only the Blue Line has been confirmed by the government so far, Mah Sing is confident that the Circle Line will also be approved soon. This could be particularly positive for its largest project, the Icon City in Petaling Jaya.
Valuation and recommendation
The roadshow was our second one with the company. In the three years since our first roadshow in 2008, the company has made great strides in driving sales and profits even during the 2008/9 global financial crisis, selling RM1.55bn worth of properties in 2010, which is second only to industry leader SP Setia. Even during 2008/9 when many developers saw earnings contractions if not losses, Mah Sing continued to show profit growth. With record sales in 2010 and a likely record-breaking 2011, Mah Sing’s earnings are set to accelerate in the coming years. This is the key re-rating catalyst for the stock and the reason for our upgrade of its target price from RM2.35 to RM3.30 in January.
Besides record sales and rapid earnings growth, the other major re-rating catalyst for Mah Sing is newsflow on landbanking. This is because under Mah Sing’s quick turnaround model, new land purchases should be earnings accretive within 2-3 years, often much earlier as the group targets to launch properties on any new landbank within six months from acquisition. Beyond the regular smallish parcels of land that Mah Sing can unlock value from quickly, it is mulling a transformational move of acquiring large parcels of land, perhaps 500 acres or more that it can develop over a longer period of time. Such land would help sustain sales and earnings over a longer period of time and should also gradually boost margins as land cost as a percentage of total cost falls over time and enhancement of the value of the land will accrue more to the developer.
Mah Sing remains an OUTPERFORM in our books and our top pick in the property sector. Also unchanged is our target price of RM3.30 based on our target market P/E of 14.5x. The roadshow reaffirms our strong conviction in the stock. Investors with a higher appetite for risk can consider its numerous call warrants. Mah Sing is one of the most liquid property stocks in Malaysia with a 3-month average daily volume of 5.9m shares and value of RM14.4m. Potential re-rating catalysts include 1) record sales from strong take-up of new large projects, 2) robust newsflow due to aggressive landbanking and 3) increasing investor awareness of Mah Sing’s cheap valuations and transformational moves.
