Mah Sing establishes RM1 billion perpetual securities programme

KUCHING: Mah Sing Group Bhd (Mah Sing) has established a RM1 billion perpetual securities programme with an RM650 million first tranche set to be issued by the end of March.

The establishment of the unrated senior perpetual securities programme was made in a recent filing on Bursa Malaysia where the group’s management guided that the proceeds from the issuance would primarily be earmarked for landbanking and working capital.

The issuance carries a semiannual fixed rate coupon of 6.9 per cent per annum (p.a) and is the group’s second perpetual bond program. Its first program was an issued RM540 million back in April 2015 at 6.9 per cent per annum.

The research arm of Kenanga Investment Bank Bhd (Kenanga Research) was taken back by this development as they noted that while land prices have stabilised in recent quarters, they have not yet dropped to ‘bargain hunting’ valuations as of late.

“We were surprised by the issuance as Mah Sing’s net gearing was comfortable at a recorded 0.02 fold in its fourth quarter of 2016 (4Q16) which would have allowed them to comfortably gear up for land banking by itself,” the research arm explained.

As no exact ratio has been given by management as to how the new funds would be allocated to landbanking and working capital, the research arm assumed a 50:50 per cent allocation.

“Further assuming land is financed based on a 70:30 debtequity ratio, this would bring potential funds for land banking to RM500 million and land cost-togross developmental value (GDV) ratio to 15 per cent.

“Potential GDV replenishment could be RM3.3 billion which would increase our forward sumof-parts (SoP) by 4 per cent to RM2.82,” shared the research arm, further adding that they found the issuance exercise to be neutral to slightly positive for the property developing group.

Besides, utilising the raised capital for landbanking and working capital, Mah Sing’s management also guided that they would be utilising the funds for construction acceleration for projects with a good take-up order.

“This move is to expedite the collection expected from final stage billings on deliberate of vacant possession of properties in 2017,” Mah Sing explained.

The research arm is expecting RM607 million worth of Mah Sing properties to see vacant possession in the coming year which indicates that the group’s landbanking pace may turn extremely aggressive.

Meanwhile, the construction acceleration of projects is also expected to offset some of the interest generated from the RM1.0 billion issuance exercise as original estimations from the research arm indicate that the group’s Financial year 2017 to 2018 estimated (FY17-18E) core net profit (CNP) would be lowered by 6 to 13 per cent due to the issuance.

After taking into account the project accelerations, however, FY17-18E CNP is only reduced slightly by 2 to 4 per cent.

Kenanga Research maintains its ‘Market Perform’ call on the stock with an unchanged target price of RM1.49 which is based on a property Revised Net Asset Valuation (RNAV) discount of 54 per cent or implied (SoP) discount of 45 per cent to its FD SoP of RM2.72.

Additionally, Mah Sing enjoyed decent unbilled sales visibility and a light balance sheet which lends strength to its ability to sustain its dividend pay-out of 40 per cent.

“This implies current yields of 4.5 per cent, which is attractive compared to big-cap developers of 2.7 per cent.”