Mah Sing sees recovery ahead after difficult year

This article first appeared in The Edge Malaysia Weekly, on February 11, 2019 - February 17, 2019.

Leong: Demand is slowly coming back and it will take one or two years for things to pick up again.

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IT has been a tough couple of years for property developer Mah Sing Group Bhd and full-year revenue and net income for 2018 are forecast to hit a five-year low at best.

But that may be as bad as it gets for the company, says group managing director Tan Sri Leong Hoy Kum, who sees the decline in annual property sales stabilising this year.

“At the very least, I do not see a further dip [in sales from last year], thus, revenue would not see big fluctuations [going forward],” Leong tells The Edge.

In the nine months up to Sept 30, 2018, (9MFY2018) Mah Sing reported a net profit of RM205.57 million, down by nearly 25% year on year, as revenue slipped 22% to RM1.68 billion.

For the full year, revenue is expected to fall 19.5% y-o-y to a five-year low of RM2.35 billion, according to the average estimate of 13 analysts who are tracking the stock.

Its FY2018 net profit is forecast to come in a third lower y-o-y at RM239.1 million, or a six-year low.

For FY2020, analysts project a slight recovery and mean revenue of RM2.49 billion and a net profit of RM254.8 million.

The company’s expected sharp earnings dip for FY2018 reflects a tough property market that is still correcting after several years of froth.

In a nutshell, the overheated market led to a wide pricing mismatch in housing supply and demand, causing a sharp rise in unsold completed homes. Overhang residential units — homes unsold nine months after completion — hit 24,738 by end-2017, a 67.2% increase y-o-y. Total overhang value surged 82.8% to RM15.64 billion.

Six months later, the total overhang had risen further to 29,227 units with total overhang value increasing to RM17.42 billion, according to data tracked by the National Property Information Centre (Napic).

While many developers, including Mah Sing, responded by moving into more affordable price ranges, the adjustment across the market has generally been painful as margins shrank and sales declined.

That said, Leong feels the market has hit bottom. “I think we have seen the worst already for the last three years [2016 to 2018]. Demand is slowly coming back and it will take one or two years for things to pick up again.”

Leong reckons Mah Sing is likely in the first year of the two-year recovery phase after the anticipated earnings plunge in 2018. Its full-year results are expected later this month.


‘Pipeline can grow’

He cautions that recovering demand does not mean the good times are back, and observes that Mah Sing’s product mix remains relatively unchanged.

For this year, Mah Sing has set a minimum annual sales target of RM1.5 billion, its lowest in years and less than half of its last peak of RM3.4 billion sales recorded in 2014.

Since then, annual sales have fallen — to RM2.3 billion in 2015, and RM1.8 billion in 2016 and 2017.

Leong stresses that the RM1.5 billion figure is a minimum target and that Mah Sing is prepared to add to its new launch pipeline depending on market conditions.

Much of the targeted sales are expected to come from its new pipeline of launches this year, worth RM2.2 billion in gross development value. About half of the new products are priced below RM500,000 and another 31% are in the RM500,000 to RM700,000 range.

That is generally consistent with Mah Sing’s sales mix last year. As at 9MFY2018, the developer had recorded RM1.22 billion in sales, half of which comprised properties priced at RM500,000 or less.

In a Jan 3 note, AmInvestment Bank notes that Mah Sing is “on track to achieve its FY2018 target of RM1.8 billion”.

On average, Leong says Mah Sing’s new launches had seen a take-up rate of 70% and 80% in the recent slowing market, even though it is taking longer to convert the take-up into sales.

Generally, up to 40% of bookings are cancelled because of difficulty in getting end-financing. However, the dropouts are usually replaced by new buyers, Leong says.

His trump card is Icon City 2, a commercial development located in Petaling Jaya at the intersection of the Federal Highway and the Damansara-Puchong Highway (LDP).

Of the project’s total GDV of RM2 billion, Leong says only RM400 million had been included in the current new launch pipeline of RM2.2 billion, representing Phase 1.

He adds that more phases could be launched this year if market conditions are right, potentially growing the new launch pipeline further.

The project is a continuation of the Icon City project, which is located next door and comprises mainly residences as well as commercial outlets.

Spread across 14 towers, Icon City 2 will offer 30 shopoffices, 58 retail shops, 582 residential units and 456 small office, virtual office (SOVO) units, plus a nine-storey office tower.

He is confident that Icon City 2 will do well, citing Napic statistics that show occupancy rates for purpose-built offices in Petaling Jaya had risen steadily from 2013 to 2017.

In comparison, the occupancy of Kuala Lumpur offices had generally declined. “Many Kuala Lumpur operations have been moving to Petaling Jaya, which does not have enough offices,” he adds.


Big shopping list

Although it is navigating an earnings slump, Mah Sing remains on the lookout for land, armed with nearly RM1 billion in its war chest.

“There are now fewer competitors [in the market for land], so that is why this is a good year to buy because I can cherry-pick and have a more reasonable and competitive land cost,” says Leong. “We are talking to a couple of vendors.”

He adds that for this year, Mah Sing is eyeing pocket-sized parcels of 5 to 50 acres in Kuala Lumpur, as well as larger township tracts of 300 to 1,000 acres in the Klang Valley, Johor and mainland Penang.

Any acquisition would add to Mah Sing’s existing 2,108-acre land bank, which has an estimated total GDV of RM24 billion, according to analysts.

As at last Sept 30, the developer’s cash balance was RM922.4 million, with total borrowings and term loans amounting to RM635.8 million, meaning it is in a net cash position.

That does not include an expected RM145 million from its unrated senior perpetual securities issuance in mid-November last year.

“There is still a lot of room for us to gear up for land bank,” says Leong, adding that the internal net gearing cap is set at 0.5 times.

It is worth noting that 8 out of 13 research houses tracking Mah Sing have a “buy” call on it, with target prices of RM1.09 to RM2.03.

Mah Sing closed at 95 sen per share last Thursday, valuing the company at RM2.31 billion. Over the past one year, the stock has shed 23% of its value.

Leong says the company has no control over the share price but reiterates its commitment to rewarding shareholders through dividend payouts.

He points to Mah Sing’s track record of a minimum 40% payout ratio over the past 12 years, even during the recent lean period.

“We have been very resilient and I think the market is coming back. The government is also coming up with initiatives to help the industry and homeowners, so we are looking forward to the coming years.” 

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