Mah Sing Group Bhd (Aug 3, RM2.44)
Downgrade to hold at RM2.44 with revised target price of RM2.44 (from RM2.51): We gather that the authorities have consulted with Mah Sing's management on property sector policies and understand the company's outlook on tightening measures in the property sector concurs with ours, that harsh tightening measures are unwarranted at this juncture and unlikely to materalise this year. This is premised on the absence of a widespread property bubble and given that banks have been cautious in loan approvals. Any tightening measures are likely to be limited to soft measures and only implemented in 2012.
On Tuesday, Mah Sing announced a joint venture agreement with Asie Sdn Bhd (60:40) for the joint development of 4.08 acres along the Jalan Tun Razak-Jalan Pahang area (gross development value [GDV] RM900 million). The total implied consideration is RM106.6 million implying RM600 psf. This is is considered costly against S P Setia's Sky Residences cost of RM300 psf in 2007. This is the first JV development for the 58 acres of urban regeneration, the largest privatised urban regeneration project in Kuala Lumpur (GDV: RM9 billion). M Sentral will comprise smaller and more affordable serviced residences. The piece of land is immediately available for development and is within walking distance of the Titiwangsa Star-LRT interchange station.
Mah Sing has already chalked up RM1.24 billion worth of sales, against its RM2 billion year-end sales target. It has another RM500 million in sales bookings, which will be converted once the sales and purchase agreements (S&Ps) are signed. Unbilled sales stand at RM1.6 billion. We gather that the management will be diverting its focus to mass market products and therefore expect sizeable land acquisitions in the coming six months.
We downgrade the stock to "hold" with a revised target price of RM2.51. While sales momentum appears intact and on track to meet its ambitious targets, the stock appears fairly valued at this point in view of its share price outperformance (+36% year-to-date). The downgrade also reflects our view that the broader industry valuation cycle could have peaked. Our revised RM2.51 target price is based on a 10% discount to realisable net asset value (previously RM2.59 based on 9.7 times 2012 priec-earnings ratio), and implies a 2012 PER of 12.1 times, 32% above its historical mean of 9.2 times.
In the coming six months, we expect more land acquisitions, probably still in the Klang Valley and in the region of 200 to 300 acres. We suspect Mah Sing is aiming for larger acreage for township development, which includes affordable mass market products. Currently, Mah Sing has about 900 acres of undeveloped land with an estimated GDV of RM12.4 billion.
We note that the share prices of property companies react positively to lower debt levels, particularly in an uncertain macroeconomic outlook. Mah Sing turned from a net cash position in 2009 to 0.22 times net gearing in 2010 and subsequently geared up further to 0.32 times as at 1Q11. This is likely to rise to 0.4 to 0.5 times by end-2011 as the group plans to acquire sizeable land for affordable mass market products. This raises concerns of a longer-term burden as township developments usually require longer gestation periods. Effective infrastructure needs to be set up before attracting mass population, and this could result in slower sales in the initial phases of development. Recall that S P Setia kept its net gearing below 0.3 times since 2006 and turned net cash recently, largely aided by the recent two-year property boom.
At RM2.44, Mah Sing is trading at 14.7 times 2011 PER and 12.1 time 2012 PER — above its historical mean of 9.2 times and +1 standard deviation mean of 13.2 times. While we are positive that it will achieve its end-2011 RM2 billion sales target, upside could be limited from a valuation stand point as take-up rates may decelerate on the back of higher property prices against two years ago.
We have adjusted our 2011/12 net earnings upwards by 6% and 15% and introduce FY13 earnings, after factoring in Mah Sing's latest project status including the latest M Sentral. Our forecast is relatively conservative compared with consensus estimates.
The key risk to our forecasts is the timing of project launches and take-up rates. A share price catalyst would be better than expected take-up rates for upcoming projects. — UOBKayHian, Aug 3
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