Mahsing ... Sep10

CIMB Research Report.

• Maintain BUY recommendation. Mah Sing’s proposed issuance of RM325m convertible bonds was not entirely a surprise given the group’s aggressive landbanking activities. Nonetheless, the cash-raising exercise is a slight negative as it comes on the heels of a recent private placement and before actual land acquisitions. Although the exercise could dilute FY11-12 fully diluted EPS by 12%, we are keeping our forecasts for now as the proceeds will be channelled to the purchase of more “quick turnaround” land which should help offset the dilution. But we are trimming our target price from RM2.40 to RM2.35 as we now roll it over to 2012 and apply a wider 20% discount to our target market P/E of 13x instead of 10% to factor in the potential dilution. We continue to rate Mah Sing a BUY, with the potential re-rating catalysts being 1) continued strong newsflow on landbanking exercises, and 2) robust sales and accelerating earnings growth.

• Proposed convertible bonds. Last Thurs, Mah Sing held an analyst briefing to explain its proposed RM325m 7-year redeemable convertible secured bonds. The bonds will carry a semi-annual coupon of 3.5%, lower than the group’s borrowing cost of 4-5%. The conversion price will be at a 15% premium over the 5-day weighted average price on a date to be determined later. The bond issue will increase the group’s borrowings by 96% to RM664m, raising net gearing from 0.05x to 0.43x. The proceeds will be used for landbanking purposes.

• Short-term pain, long-term gain. The bond issue is a slight negative as it will result in short-term earnings dilution since contribution from the land to be acquired will only come in later. But the fundraising exercise is necessary as Mah Sing wants to be a top developer but lacks the balance sheet and landbank to do so. The fact that it is laying the groundwork for potentially big acquisitions augurs well for the longer-term prospects. Recall that leading developer SP Setia also had to go through a big rights issue to finance its purchase of the 3,930 acres of Bandar Setia Alam land, which catapulted the group to the top position in the property sector.

Outlook - Issuance of RM325m convertible bonds

Last Thurs, Mah Sing held an analyst briefing to explain its proposed RM325m 7-year redeemable convertible secured bonds. Executive Director Steven Ng went through a brief history of the group and explained its successful “quick turnaround” landbanking model and how the bond issue fits into that strategy. The bonds will carry a fixed semiannual coupon of 3.5%, lower than the group’s borrowing cost of 4-5%. They can be converted anytime at a conversion price which will be set at a 15% premium over the 5-day volume weighted average market price on a price fixing date to be determined later. The bond issue will increase the group’s borrowings by 96% to RM664m, raising net gearing from 0.05x to 0.43x. It is expected to take six months to complete and the proceeds will be used for landbanking purposes. The bonds will not be listed on any exchange and will be placed out by Hong Leong Investment Bank, the principal adviser and lead arranger.

Bonds a precursor to major transformation?
On the surface, the proposed bond issue is a slight negative as it will result in shortterm earnings dilution as the contribution from the land to be acquired will only come in later. Assuming a 15% premium over Thursday’s closing price, the RM325m bonds can be converted into 164.3m new Mah Sing shares, which would enlarge its share cap by 19.7% to 996m shares and result in EPS dilution of 12% for 2011 and 2012 (see Figure 2). But the fundraising exercise is necessary as Mah Sing wants to be a top developer but lacks the balance sheet and landbank to do so. The fact that it is laying the groundwork for potentially big acquisitions augurs well for the longer-term prospects. We believe the group has identified numerous parcels of strategically located land for acquisition including government land privatisation parcels. Leading developer SP Setia (SPSB MK; Outperform) also had to go through a big rights issue in the early 2000s to finance the acquisition of the 3,930 acres of Bandar Setia Alam land in Shah Alam, which catapulted the group to the top position in the property
sector. SP Setia’s share price initially took a hit due to the earnings dilution but the share price eventually rallied on the back of its excellent execution of the mammoth project.