Mah Sing Group - BUY - 12 May 2008

Mah Sing Group - Cash is King! (Initiating Coverage)



Price: RM1.52

Target Price: RM2.07

Recommendation: BUY



· Plastics to property development. Mah Sing Group Bhd (MSGB) evolved from plastic injection moulding to a high growth property development company in 1994, which currently accounts for 95% of FY07 operating profit. The Main Board listed company has since sold some RM2.8b from its on-going projects in Klang Valley (KV) and Johor Bahru (JB).

· Strong balance sheets due to quick "turnaround" niche projects, with high cashflow generation. Hence, MSGB is able to quickly capitalize on different property cycles or command stronger bargaining power due to its strong cash position. For example, MSGB can 1) enhance margins through more "build and sell" products which command higher pricing 2) embark on aggressive landbanking. We estimate that MSGB can raise c.RM519m from cash and debt for land acquisitions or a potential overseas venture in Vietnam.

· Capitalizing on commercial properties' up-trend, which have fatter margins (pretax margins of 30% - 35% versus township's 20% - 25%) and faster project "turnarounds" compared to townships. MSGB was able to secure 3 en bloc sales worth GDV RM734m in 2007, with two towers of the The Icon at Jalan Tun Razak and The Icon at Mont Kiara to Kuwait Finance House (KFH), Autron Corp Ltd and Felda.

· Prefering en bloc commercial sales for better earnings visibility. Distinguished en bloc buyers like KFH, elevates MSGB reputation and increases further en bloc sale opportunities. Securing en bloc sales for The RM265m Southgate commercial project on Jalan Sungai Besi, will be a re-rating catalyst. We expect the commercial segment to account for 31% and 40% of FY08E and FY09E revenue.

· RM1.28b Southbay in Penang ensures geographical diversification. To hasten the time to market, MSGB intends to replicate its successful Residence and Legenda models that should appeal to the Penangites penchant for landed properties.

· Our target price of RM2.07 is based on our sum of parts RNAV on a fully diluted basis. We expect the commercial sector to underpin FY08E net profit YoY growth of 23% to RM100m, on the back of RM1b unbilled sales and RM706m new FY08 launches. We are also forecasting a 5.3% FY08E dividend yield with attractive FY08E and FY09E PER of 9.4x and 6.9x, respectively. Initiate with a BUY call.





KENANGA INVESTMENT BANK BERHAD (15678-H)