Mah Sing attracts glove bulls, share price jumps

KUALA LUMPUR (Oct 16): Mah Sing Group Bhd jumped as much as 28% this morning amid optimism that the property developer’s venture into rubber glove production will give a fresh income source.

Investment analysts who track the stock anticipate rubber glove production to contribute RM100 million to RM230 million in net earnings a year. Mah Sing’s valuation has been lifted as analysts are valuing the group based on the existing rubber makers’ premium valuations.

As at 11.15am, the property stock had soared 21.5% or almost 30% to 94 sen. Trading volume swelled to 409.24 million shares, making it the most actively traded counter on Bursa Malaysia in the morning session.

Among the optimistic ones, RHB Research Institute raised its target price (TP) for Mah Sing to RM1.28 from 91 sen, while MIDF Research revised its TP to RM1.10 from 82 sen previously.

RHB analyst Loong Kok Wen said the rubber glove business would add resilience to Mah Sing’s cyclical earnings from property development.

“Earnings for next year will likely see a quantum leap as earnings from the glove business start to kick in,” said Loong, raising her earnings forecasts for the financial year ending Dec 31, 2021 (FY21) and FY22 by 56% and 126% respectively.

“Based on management’s guidance of ASPs (average selling prices) of US$80 (RM332.48)-US$160 and cost of US$25-US$27/box of 1,000 pieces, we estimate its FY21-22 net earnings to be topped up by roughly RM100 million and RM230 million [respectively], contributing 37%-56% of the group’s total earnings,” Loong wrote in a note today.

Loong expects Mah Sing to earn net profit of RM274 million for FY21 and RM415 million for FY22, translating into earnings per share (EPS) of 11 sen for FY21 and 16 sen for FY22.

For valuation, she used Rubberex Corp (M) Bhd as the yardstick given the two’s similar production capacities. Loong valued Mah Sing’s rubber glove business at a price-earnings ratio (PER) of 15 times.

Meanwhile, MIDF Research analyst Jessica Low Jze Tieng commented that the venture into glove manufacturing could attract glove bulls to Mah Sing as the group’s current valuation is “undemanding by trading at a PER of five times FY21 EPS, compared with higher valuations of bigger glove makers.

Low anticipated the earnings contribution from glove manufacturing to “more than double” Mah Sing’s earnings for FY21 as the group targets to sell gloves at a spot order price which is much higher than the contractual price.

“We estimate glove manufacturing to contribute earnings of more than RM150 million for FY21 based on a conservative spot order price of US$60/1,000 pieces against the current spot order price of US$80-US$160 per 1,000 pieces,” Low wrote in her note.

She bumped up her FY21 earnings forecast by 152% to RM266.5 million after inputting the earnings contribution from glove manufacturing and EPS of 13.2 sen.

Low said MIDF had revised its TP for Mah Sing to RM1.10 from 82 sen as it changed its valuation method to sum-of-the-parts (SOTP)-based from realisable net asset value (RNAV) to better reflect the value of Mah Sing with significant contributions from its property and glove segments.

Meanwhile, Hong Leong Investment Bank (HLIB) Research analyst Andrew Lim Ken-Wern concurred that the proposed diversification would enable Mah Sing to take advantage of the glove business with positive long-term industry prospects and additional demand from the Covid-19 outbreak.

Ideally, Lim said the group would be able to tap into its expertise in the regional plastic business in order to synergise with this potential venture.

However, Lim did not revise his earnings forecasts, keeping his TP at 85 sen based on an unchanged discount of 60% to RNAV of RM2.14.

“We keep our forecasts unchanged for now, pending further solidification of the plans. We note a potential upside to our FY21-22 earnings forecasts,” he said.

“Our ‘buy’ call is premised on commendable take-up of its recent launches and its cover ratio of 1.1 times to provide earnings visibility, coupled with positive sentiment associated with its foray into gloves.

“We see value in the stock as it is priced at a P/B (price-to-book value) valuation of 0.5 times (-2 standard deviation [SD] of its five-year mean) and lower than its GFC (global financial crisis) trough of 0.68 times,” he added.

Source: TheEdgeMarkets