Mah Sing Group - Emerging proxy to property sector BUY

- We are initiating coverage on Mah Sing Group Bhd, with a BUY rating and a fair value of RM3.60/share – based on a mid-cycle discount of 25% to our estimated NAV of RM4.80/share. Our fair value implies a PE of 12x on FY13F’s earnings. 

- Given a changed competitive landscape, Mah Sing’s ascendancy under the stewardship of its energetic major shareholder Tan Sri Leong Hoy Kum should now firmly solidify its valuation from longoverdue market recognition of its entrepreneurial spirit in driving NAV growth. The soon-to-be-launched Southville City (GDV: RM2.2bil) in Bangi would again be a good testament to its slick execution.

- The project, with a direct frontage to the North-South Expressway, is earmarked to be the commercial hub of the southern corridor Klang Valley. This locality is significantly under-served despite its strong urbanisation trend as evident from several land acquisitions by other developers and surrounding mature townships providing a ready catchment.

- Mah Sing is set to capitalise on the imminent return of pent-up residential demand; the impact of the responsible lending guidelines has normalised. Some 90% of its development projects (total GDV: RM16bil) are at the early stages of their life cycles and hence, annual pre-sales would accelerate, rising from RM2.8bil this year to RM3.3bil in FY13F and reaching RM4.0bil in FY14F.  

- Its township M Residence in Rawang is rapidly growing in popularity, with demand boosted by the well-tenanted AEON retail mall. Future landbanking would centre more on township developments. Several tracts of land, including one or two ‘strategic’ parcels, are currently under negotiations. Acquisition newsflow momentum would continue.  

- Earnings delivery appears intact – current unbilled sales of RM2.5bil are already about 1.8x FY11’s property revenue. We forecast earnings to expand by 24% to RM209mil in FY12F before growing by another 24% to RM260mil in FY13F and reaching RM320mil in FY14F – in line with management’s earnings growth target of 20%-25% per annum. 

- Backed by a strong balance sheet (net gearing: 33%) and growing presales, management is committed to maintaining its generous dividend payout policy of 40%, translating into dividends of about 11 sen-15 sen/share over FY12F-14F. At its last traded share price of RM2.42, the dividend yield of between 4% and 6% is attractive compared to the market’s yield of 3%. 

- Despite its status as the sixth largest property stock by market capitalisation, Mah Sing is very undervalued from both the earnings (forward PEs: 6x-10x, and EPS CAGR: 24%) and assets standpoint (50% discount to our NAV). Historically, Mah Sing has admittedly traded at a PE discount to its larger peers, but this valuation gap would soon close for three main reasons: sustained earnings delivery with a generous dividend policy, astute landbanking to drive NAV growth and a belated appreciation of its strong management team under entrepreneur developer Tan Sri Leong.    

Source: AmeSecurities