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Monday, February 22, 2016

Mah Sing upbeat about its cash position

PETALING JAYA: Amid the slowdown in the property market, most developers would prefer to hang on to cash.

However, Mah Sing Group Bhd forked out RM337.1mil last week to repurchase its outstanding redeemable convertible secured bonds just four months short of its fifth anniversary redemption date.

The reason is because the group is confident of its cash flow position going forward and wants to minimise dilution on its existing shareholding.

“It was a move for several reasons. Among them is to prevent dilution and save interest payments,” an official close to the company said.

Mah Sing is expecting about RM650mil worth in collections from final stage buildings this year. They will come from completed projects such as the M City on Jalan Ampang, Icon City in Petaling Jaya and SouthvilleCity@KLSouth, Bangi.

Mah Sing’s convertible bonds, which were issued in June 2011 with a seven-year maturity, had a nominal value of RM315mil and book value of RM292mil as of September 2015.

“In fact, based on the purchase consideration of RM337.1mil and the conversion price of the CBs of RM1.14, the effective price per Mah Sing Share is RM1.22,” the official said.

Mah Sing’s bondholders would have the option to redeem the bond five years from the time of issuance – June 2011.

Had it not repurchased the bonds, the company would have faced further dilution in its shares as bondholders exercise their right to convert their holdings into shares, as was done last June with RM10mil worth of bonds converted into 8.77 million shares.

“Our repurchase keeps us safe from further dilution,” said the official.

While the buyback has been estimated to result in a RM30mil one-off non core loss in 2016, with the repurchase, analysts concur that the loss should more or less be offset by the savings on interest expense going forward, as the property developer incurred about RM19mil in interest expense related to the bonds annually.

“As most of the expense was capitalised as property development cost, the repurchase of convertible bonds should raise its pre-tax profit by less than 1% in the future,” said CIMB Research, who raised its financial year 2016 (FY16) and FY17 forecasts by 0.6%-1% to account for the interest savings and maintained its “hold” call on the stock as it lacked a “strong re-rating catalyst”.

“We would turn more positive on it if the company significantly outperforms its 2016 sales target of RM2.3bil,” the research house said.

Currently, Mah Sing has 35 projects in various stages of progress.

With six launches, or RM2.3bil gross development value worth of projects slated for 2016, Mah Sing said it has been rather conservative in the past year as it would only launch upon sufficient interest and take up rates.

The company spokesperson explained that the spread of multiple projects across different stages ensures consistent delivery of earnings and cash flow.

“With the balanced mix of mature, growing and new projects, we ensure continuity in our business. We also ensure that we are not overly taxed by tending to projects that are all in their starting stage, or fanning ‘idle’ projects that have mature.”

“We are still looking to add to our land bank as we don’t want to lose out of growth opportunities,” she adds.

In terms of sales strategy, Mah Sing had always targeted for at least a 50% take up rate for its launches within three months, and 70%-75% within six months.

“It helps that we are conservative and selective, hence we won’t launch until we are satisfied with the registered interest,” she said, adding that most of Mah Sing’s projects met those sales targets.

“As with maiden launches in any of our projects, the take up rate is 90% to 100% within a month of the launch. This strategy has worked very well for us.”

Mah Sing has 2,540 acres of undeveloped land bank; 60% of it in Greater Kuala Lumpur, 24% in Johor, 10% in Penang and the remaining 6% in Kota Kinabalu, Sabah.

The spokesperson said Greater KL continued was a hotbed of interest for the market as 50% of the property developer’s sales in 2015 came from the area, and that it registered a steadier demand than Iskandar Malaysia.

“Eighty-nine per cent of this year’s launches are priced below RM1mil, as we have planned for our product mix to suit the current market.”

“We are open to new joint venture opportunities. With any of our landbanking deals, we do have very strict investment criteria, so as long as those needs are met, we are ready to embark.

“In terms of balance sheet, we are strong. We are not desperate for land as we have RM25.9bil worth in undeveloped gross development value. By adding in the RM4.75bil in unbilled sales, that would equal more than RM30bil in potential future revenue that can support us the next eight years,” she said. “That puts us in a good position to lock in future deals as we don’t want to miss out on growth opportunities.”

For the third quarter ended Sept 30, 2015, the company posted a net profit of RM84.4mil, 6.4% lower than the RM90.2mil posted in the same period last year.

Revenue came in at RM770.7mil, 8% higher than RM713.6mil the year before.

For the nine months ended Sept 30, 2015, revenue from property development was RM2.1bil, a 15.3% improvement compared with the RM1.8bil achieved in the corresponding period last year, whereas operating profit also increased slightly by 0.6% from RM328.2mil to RM330.4mil.

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