MAH SING : Maintain BUY at RM1.72, TP of RM2.30

Mah Sing raises money for future landbanking

Mah Sing Group Bhd
(Sept 13, RM1.74)
Maintain buy at RM1.72 with target price of RM2.30: MSGB’s seven-year redeemable convertible secured bonds proposal is to fund future land acquisitions. It is eyeing a sizeable landbank (over 200 acres) in the Klang Valley. Without factoring in any new projects from bond proceeds utilisation, our FY2011-12 EPS could be diluted by 15% to 21% and realised net asset value (RNAV) per share down by 17% assuming full bond conversion. No change to earnings forecasts and RM2.30 target price for now. Maintain “buy” call.

The issue price for the RM325 million bonds will be determined later, while the conversion price will be at a premium of circa 15% to the five-day volume weighted average market price of MSGB shares on price-fixing date. Coupon rate for the bonds is up to 3.5% per year (compared with its current circa 4.3% average floating rate borrowing cost) payable in arrears on a semi-annual basis. The bonds are convertible immediately after the issue date until maturity. There is a put option by bondholders on the fifth anniversary of the issue date to require the company to redeem, in whole or in part, the bonds. The proposal is expected to be completed by 1H2011.

No details are available yet on where the 200 acres MBSB wishes to acquire are located, but we suspect it could be somewhere in Cyberjaya, the recent “hot spot” for developers (such as Glomac, UEM Land, OSK Property and Paramount) and near to MSGB’s existing Garden Residence project (RM424 million remaining GDV; 45 acres remaining landbank).

Assuming RM1.98 conversion price (+15% premium to current price), MSGB’s number of shares could jump to 996 million (+19.7%). Based on our estimates, ceteris paribus, the conversion could dilute our FY2011-12 EPS by about 15% to 21%, whilst RNAV could drop by circa 17% to RM1.92 per share. However, this scenario is unlikely as we believe: (i) bond conversion will occur in stages; and (ii) contributions from existing and potential “new” projects will reduce the dilutive impact. Meanwhile, net gearing could potentially increase from estimated 0.2 times in FY2010 to 0.6 times in FY2011 post-bond issuance. — Maybank IB Research, Sept 13


This article appeared in The Edge Financial Daily, September 14, 2010.