Mah Sing Group - Another land acquisition, 3 more in the pipeline

Price: RM1.84
Target Price: RM2.33
Recommendation: BUY

· 12.91ac freehold industrial land acquired in Bukit Jelutong, Shah Alam for RM21.3m (RM38psf) from Flextronics Technology Sdn Bhd. This is Mah Sing Group’s (MSGB) second land acquisition in 2009. Acquisition likely to be internally funded given its strong balance sheet; net gearing is 0.14x with RM159m cash balance at 30/6/09; additional RM235m inflow from completion of The Icon, Jln Tun Razak in 3Q09 will put MSGB in a net cash position.

· Triple frontage and strategically located in a matured industrial area. The site is within the existing Bukit Jelutong Business and Technology Park, implying ready infrastructures. Prime connectivity with accesses to the NKVE, Guthrie Corridor Expressway, ELITE and Federal Highway.

· RM100m GDV industrial development, named iParc, over 2 year period. 40 units of 3-storey semi-detached corporate warehousing units (flexible layout), with 5,400sf - 7,400sf built-ups, will likely be priced at RM2.4m-RM2.8m per unit. Price comparables are lacking as most of the buildings are terraced and old, with built-ups of >10,000sf. Based on the above, we estimate 250,000sf NSA, implying low yield per acre, and hence, we expect leaner GDP margins of 20%-22%. Although margins may not be as attractive, there is quicker profit recognition and recovery of land costs, along with better cash flow.

· Local light industrials looking to upgrade are MSGB’s main target market. We caution investors that industrial property demand could be soft in current economic conditions. However, as the economy recovers, MSGB can quickly capture the area’s pent-up demand as 1) iParc product is unique as these are semi-detached, not link units, allowing for better logistical planning 2) not many new products.

· No changes to our FY09-10E net profit of RM96m-RM100m since launch date is not firmed yet. However, under MSGB’s quick-turnaround model, launch is usually 6-9 months of land acquisition.

· Fair value of RM2.33 unchanged based on our FD SOP RNAV. We are valuing the land at purchase price given the lack of comparables. Near term catalysts are 1) 3 more land acquisitions by year end comprising of 1 township size land and 2 niche landbanks in Klang Valley 2) another en bloc deal for Southgate Apex blocks by year end 3) improved market sentiment. Our fair value implies 14.6x FY10E PER vs. 14.1x historical average. BUY.