Investment Highlights

• We maintain BUY on Mah Sing Group (Mah Sing) with a higher SOP-based fair value (FV) of RM1.47/share (from RM1.25/share previously) based on our revised SOP calculation. Our FV is based on an unchanged discount rate of 40% to our RNAV and a neutral 3-star ESG rating .

• The FV implies a FY25F PE of 13x, at parity to the average of mid-cap property stocks currently.

• We also maintain our earnings forecast following our recent meeting with Mah Sing’s management. Here are the key takeaways:
  
  (i) Mah Sing’s sales momentum in 1QFY24 remained strong with expectation of a 10% YoY growth in sales, buoyed by escalating property demands in Johor and the Klang Valley. Hence, we expect a YoY growth in core net profit (CNP) for 1QFY24 to exceed RM50mil. Key contributors to the new sales will be M Minori, Meridin East, M Senyum and M Nova.
  
  (ii) As at 4QFY23, Mah Sing net gearing ratio was low at 0.08x. Also, Mah Sing has incoming Vacant Possession (VP) funds of up to RM500mil in FY24, which will generate significant free cash flow to the group. Its strong financial strength provides sufficient room to gear up for future value-accretive land acquisitions.
  
  (iii) Mah Sing is currently under negotiation with several parties for potential land acquisitions in Klang Valley, Penang and Johor for the development of residential and industrial properties.
  
  (iv) To recap, Mah Sing acquired 7 new lands since FY23 with a potential gross development value (GDV) of RM7.7bil . In line with its quick-turnaround business model, Mah Sing plans to launch all the new developments by the end of FY24.
  
  (v) Mah Sing's newly-acquired industrial land in Sepang is slated for launch by the end of FY24. The company has proactively engaged with potential businesses, particularly those from China, and has noted a promising level of interest.
  
  (vi) Given the higher margin and faster construction period for industrial property, we expect Mah Sing’s operating margin to improve to >18% starting from FY25F, fueled by maiden contributions from the Sepang industrial land. The industrial land is anticipated to contribute 7% of the group’s FY25F CNP.
  
  (vii) Presently, exports contribute 40% to the revenue of Mah Sing's plastic manufacturing segment with Indonesia, Thailand and the Philippines being the primary destinations. Notably, Mah Sing has announced a joint venture agreement with its longstanding Indonesian plastics distribution partner in January 2024 to penetrate the growing plastic pallets market in Indonesia. The initial phase of expansion into Indonesia is projected to increase Mah Sing's total plastic manufacturing capacity by 10%. Additionally, Mah Sing is actively exploring opportunities in Thailand and the Philippines, spurred by increasing demand for plastic pallets in these markets.
  
  (viii) Mah Sing plans to unlock the value of its plastic manufacturing business through an initial public offering within the next 3 years. Since there is no specific breakdown provided for Mah Sing’s manufacturing segment in FY23, Mah Sing's plastic manufacturing business is projected to generate revenue ranging between RM300mil- RM350mil and an operating profit of RM18mil-RM21mil based on pre-Covid 8-year (FY11-FY19) compound annual growth rate (CAGR) of 6% and operating profit margin of 6%.
  
  (ix) With Mah Sing's expansion into overseas markets, we expect the plastic manufacturing segment to exceed its historical growth rate, with a projected revenue growth rate of 15% moving forward. Considering this accelerated growth trajectory, we estimate a valuation of RM250mil-RM300mil for the plastic manufacturing business, assuming a targeted PE of 10x-12x.
  
  (x) Management is presently evaluating the frequency of dividend payouts, considering a potential change to twice annually from once annually.

• The stock currently trades at a bargain FY25F PE of only 11x vs. its 3-year peak of 16x and offers an attractive dividend yield of 4%. We believe the mid-to-long-term outlook for Mah Sing remains positive backed by its:
  
  (i) savvy execution and quick turnaround business model; and
  
  (ii) strong focus on affordable properties at strategic locations which have strong demand.

Source: AmInvest Research - 25 Apr 2024