Analysts positive overall on on Mah Sing’s repurchase of bonds

KUALA LUMPUR: Analysts are generally positive on Mah Sing Group Bhd’s (Mah Sing) move to repurchase its bonds for RM337.1 million.

In a filing on Bursa Malaysia on Monday, the board of directors of Mah Sing announced that the company had entered into an agreement to repurchase RM315 million nominal value of redeemable convertible secured bonds (CBs) of the company at a purchaseconsiderationof RM337.1 million.

“The CBs will be cancelled after the purchase consideration has been paid,” the group said.

According to the research arm of MIDF Amanah Investment Bank Bhd(MIDFResearch),justification for the deal is that the repurchase will allow the company to avoid the issuance of 276.3 million shares (or 11.5 per cent of existing Mah Sing shares).

MIDF Research noted that the effective conversion price works out to be RM1.22 which is a slight discount of 2.4 per cent against the latest closing price of RM1.25.

It further noted that the rate of reduction in Fully Diluted (FD) number of shares by 276.3 million (or 9.3 per cent) exceeds the rate of reduction in FD realised net assetvaluation(RNAV)byRM337.1 million (or 6.2 per cent).

As a result, the research arm’s FD RNAV value per share has increased slightly.

AmRe s e a rch Sdn Bhd (AmResearch) opined that Mah Sing’s redemption of the balance of its CBs is a pre-emptive move to avoid a further dilution to its share capital and reduce its debt obligations.

“The CBs are currently in the money. The conversion price is RM1.14 per share. In June last year, around RM10 million nominal value of the CBs was converted into circa nine mil new Mah Sing shares.

“Based on a purchase consideration of RM337 million, the effective price that Mah Sing has to fork out to redeem the CBs is approximately RM1.22 per share.

“This represents a four per cent discount to the five-day volume weighted average price (VWAP) of Mah Sing’s shares up to February 12 (approximately RM1.27 per share).

“If the balance of the CBs was to be fully converted, this would translate into the issuance of approximately 276 million new Mah Sing shares representing circa 11 per cent of Mah Sing’s share capital as at February 12,” the research house said.

From an earnings standpoint, AmResearch estimated an uplift of 11 per cent and 10 per cent to Mah Sing’s FD FY16F-17F EPS respectively due to interest savings and the redemption of the CBs.

By the research house’s calculations,theCBshaveacoupon rate of 3.25 per cent and effective interest of 6.5 per cent (including the convertible elements).

AmResearch noted that there are minimal changes to Mah Sing’s financial year 2016 forecast (FY16F) net gearing ratio of 10 per cent, as the RM337 million redemption amount will be funded via the balance proceeds from Mah Sing’s rights that was raised last February.

“By the same token, Mah Sing’s enhanced capital structure would put the group in good stead to identify future landbanking opportunities. “This is supported byahealthyunbilledsalesbufferof circa RM4.7 billion, which includes approximately RM650 million due from the final progress billings of some major projects that have been completed (e.g. M City Jln Ampang, Icon City PJ, Southbay Penang),” it said.

Movingforward,MIDFResearch noted that post repurchase of the CBs, Mah Sing interest cost is expected to decline.

“However, this is neutralised by lower interest income,” it said.

As a result, the research arm maintained its FY15/FY16 net incomeestimatesof RM375million/ RM391 million respectively.

MIDF Research’s target price of RM1.43 per share was based on 25 per cent discount to Fully Diluted RNAV.

“The higher TP is in line with the higher FD RNAV per share,” it said.

The research arm noted that the FD number of shares has declined by9.3percentasitremovedtheCBs from its RNAV valuation.