Mah Sing Funding Exercise in 2016

CRITIQUE OF EXERCISE’S SUCCESS

A successful or accurate financial analysis for real estate investments are not easy to be done as there are many critical aspects that do not actually show in the mathematics figures on the company annual reports. Among the aspects are:

1. Involving long time horizon, which means that it is a long-term investment that has to be held for more than 10 years,
2. Lacking of liquidity, where the assets will be sold slowly and the price will be higher than market value as it goes with the rule [low liquidity = high yields]
3. Fast-changing of environment, it shows today’s rapid change business environment, markets and technologies.

RISK-RETURN

Based on the data we have gathered in the section above, we know the average annual return of Mah Sing Group Bhd is 19.73% with volatility of 23.55%. Generally, investment decision is not just about solely judging the company at its return and volatility, but also many other influencing factors which are market risks, economic outlook and etc. Furthermore, there is a risk-return tradeoff principle which describe the potential return will rise with an increase in risk. According to this principle, investors can get higher profits only if they are willing to accept the possibility of losses.

Therefore, Mah Sing Group Bhd might be one of the best risk-return investment choice as it has a constant and good financial performance with good dividend payout policy. It also has a good reputation among the investors and won so much property awards. Last but not least, most of the projects by Mah Sing Group Bhd have high Gross Development Value (GDV), which is the real estate investors and property developers’ guide to financial appraisals.

EQUITY FINANCING EXERCISE

As we refer to Appendix Figure 3, In December 2013, Mah Sing Group Bhd issued new shares with free warrants to its shareholders to raise a fund of RM400 million to finance its operations and business expansion. By doing this, Mah Sing Group Bhd indirectly reducing the net gearing ratio.

During 2016, Mah Sing Group Bhd also issued about 4500 of new ordinary shares of RM0.50 each at an exercise price of RM1.44 per ordinary share.

SUKUK FINANCING EXERCISE

Perpetual Sukuk is classified as equity when there is no contractual obligations to deliver cash or other financial assets to other. Distribution of Perpetual Sukuk will be recognized in equity when they are paid. Mah Sing Group Bhd had issued a total of RM 540 million nominal value of unrated Perpetual Sukuk on 31 March 2015. The arising proceeds has been used to refinance the existing borrowings of the company.

Referring to Appendix Figure 1, Mah Sing’s perpetual sukuk won award in 2016 from Islamic Finance News (IFN). The perpetual sukuk was successfully attracted a diverse group of investors and has good market response. With the comparison with Sime Darby Bhd who is exercising the same fund raising method, it has successfully raised RM2.2 billion of Perpetual Sukuk Wakalah. This perpetual Sukuk is the largest issuance by a non-bank in Malaysia. Moreover, this offering get oversubscribed over 1.8 times from its initial target, where it allows Sime Darby to increase the offering price at the final yield of 5.65% annually. It also rated AAIS by Malaysia Rating Corporation Berhad (MARC) which is a pretty good rating.  

DEBT FINANCING EXERCISE

In 2016, Mah Sing Group Bhd did not issue any debenture. However, according to Appendix Figure 5, Mah Sing Group Bhd has established an unrated senior perpetual securities programme of up to RM 1 billion in 2017. The purpose behind this issuance is to strengthen the net cash position, and pending land banking news. It has got a good market response where the first issuance has been oversubscribed by end of March 2017. Also, Mah Sing Group Bhd had issued similar perpetual bond back in April 2015.

With the issuance of the perpetual bond, Mah Sing gets a net gearing ratio of 2% which allow it to increase the land banking pace. Mah Sing Group Bhd assumed the issuance will increase the potential funds for land banking purpose to RM500 million from RM 350 million of fund allocation and land cost-to-GDV ratio of 15%. As compared to the company which doing the similar finance exercise, Aeon Credit Service (M) Bhd, it had issued a perpetual private debt securities of up to RM 400 million in 2013. The result of the issuance of the perpetual bond were the increase of capital adequacy ratio (CAR) and the growth of net profit and revenue in 2013 as shown in Appendix Figure 6.

Furthermore, gearing ratio is one of the most common methods used to evaluate a company’s financial fitness. It is expressed in percentage, showing the amount of existing equity required to pay off the outstanding debts. Company with high gearing ratio, which is above 50% represent a high risk in experiencing bankruptcy and debt default.

As you can see from Appendix Figure 2, Mah Sing Group Bhd has a good gearing ratio throughout the 5 latest financial year from 2012 till 2016. The ratios are all below 50% and it achieved a ratio of below 10% for year 2015 and 2016, which are 4% and 2% respectively (also refer to Appendix Figure 7). This indicates that Mah Sing Group Bhd is able to pay off the loan and it has a low-risk in having bankruptcy and loan default.

So in general we could tell that Mah Sing Group Company has greater financial stability compared with other company in the same industry. For example, SP Setia, one of the competitors of Mah Sing Group Bhd, has got higher gearing ratios throughout the year 2012 to 2016, ranging from 16% to 48% (refer to Appendix Figure 4). This shows a higher risk in facing bankruptcy and loan default compared to Mah Sing Group Bhd.

CONCLUSION

Mah Sing Group Berhad has been listed on the Kuala Lumpur Stock Exchange (KLSE) Second Board under the industrial sector in 1992 and it ventured into property development 2 years later. In 2002, Mah Sing has been reclassified as property sector on KLSE Second Board and then transformed to the main Board of Bursa Malaysia. It shows us how fast it is developing in the property sector. Today, Mah Sing Group Bhd has become one of the leading property developers in Malaysia with a wide range of projects, from residential to commercial and industrial properties.

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