The Edge Property
• Maintain OUTPERFORM. Mah Sing is continuing with its aggressive and transformational landbanking exercise that should catapult it into the big league. We believe it is ripe for a major re-rating given its excellent track record in execution and wildly successful “quick turnaround” model. We are raising our FY11-12 FD EPS by 1-3% as contributions from its recently acquired landbank should more than offset the dilution from the convertible bonds. Our target price is raised from RM2.35 to RM3.30 as we now value the stock at our target market P/E of 14.5x instead of a 20% discount in view of its strong EPS CAGR of 31% and robust landbanking newsflow. Mah Sing is now our top pick in the property sector. We maintain our OUTPERFORM rating given the catalysts of 1) accelerating earnings, 2) strong landbanking newsflow, and 3) record sales in 2010/11.
• Aggressive landbanking. 2010 was a major milestone for Mah Sing as we estimate that it sold RM1.5bn-1.6bn worth of properties, second only to the market leader SP Setia. 2011 is likely to be even better as Mah Sing is gunning for RM2bn-2.5bn sales and the acquisition of significantly more landbank than the RM4bn GDV worth of landbank acquired in 2010. More importantly, the group is eyeing major township landbank in the Klang Valley that would enable it to leapfrog into the big league, making the company too big for investors to ignore.
Quiet transformation in 2010
2010 was a watershed year for Mah Sing as the group quietly underwent a major transformation from a smallish developer with a smattering of niche projects into one to be reckoned with. It snapped up 10 parcels of land in the major property markets of the Klang Valley, Johor and Penang at a cost of RM757m and with a combined GDV of RM4bn. This is a feat that no other developer beat last year and exemplifies the group’s excellent ability to identify prime landbank that is ripe for immediate launch. The RM4bn figure is also very significant in that it effectively doubled the group’s undeveloped GDV, not counting the recent enhancement of Icon City’s GDV from RM838m to RM3bn.
Valuation and recommendation
Mah Sing has come a very long way since it ventured into property development in a big way in 2000. Some may recall that Mah Sing started off as Malaysia’s largest plastic
injection moulding company. It is one of the very few companies that have diversified successfully beyond their original businesses. Mah Sing has succeeded spectacularly in the ultra-competitive property sector, thanks to management’s sheer hard work and passion to grow and succeed. In fact, in our ranking of property stocks in terms of management dynamics and SWOT analysis, Mah Sing is second only to market leader SP Setia (see Figures 9 and 10). This is a very significant feat as there are many far more established developers with landbank purchased at a fraction of today’s cost. Mah Sing has had to work much harder than most other developers due to its lack of landbank and smaller size. But we believe it is on the cusp of another major leap forward, both in terms of size and profitability as it has laid the foundations for strong longer-term sustainable growth through aggressive landbanking complemented by its strong marketing capabilities. We also believe Mah Sing’s share price is ripe for a major re-rating in line with its solid fundamentals.
We are raising our FY11-12 FD EPS by 1-3% after factoring in contribution from recently acquired landbank which more than offsets the dilution from the convertible bonds. Despite the 14% net profit upgrade, we believe there is further upside as we have not factored in any contribution from overseas projects or potential new landbank.
The earnings upgrade lowers our CY12 FD P/E to 9.7x, a steep 27% discount to the market. We are also raising our RNAV estimate from RM1.99 to RM2.52 after increasing the land value of the Icon City project from RM200 psf to RM500 psf in view of the recent massive increase in GDV from RM838m to RM3bn. Based on its last traded price, Mah Sing is trading at a 14% discount to its FD RNAV.
In view of the group’s excellent track record in execution and wildly successful “quick turnaround” model, we are increasing our target price from RM2.35 to RM3.30 as we now tag our target market P/E of 14.5x to the stock instead of a 20% discount to our previous target market P/E of 13.8x. The removal of the discount is justified in view of the group’s strong 3-year EPS CAGR of 31% vs. the market’s 17% and robust newsflow on landbanking. Our target price works out to a 30% premium over RNAV, in line with SP Setia’s target premium. Our revised target price offers investors 51% upside to Mah Sing’s share price. Given the significant share price price and promising prospects, Mah Sing is now our top pick in the property sector. We expect the company to undergo a transformational re-rating that will narrow the market cap gap with some of its larger peers. We continue to rate the stock an OUTPERFORM. Potential re-rating catalysts include its 1) accelerating earnings trajectory, 2) strong landbanking newsflow and 3) record sales in 2010/11.
