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Tuesday, December 30, 2014

Property Developers - Not Now, Come Back Later

We reiterate NEUTRAL on Property Developers with a slight negative bias. The recent sell down has sent valuations to below mean or towards trough levels as average RNAV discounts widened to 51% (3Q14: 42%) vs. historical highs of 54%. However, we believe the time is not ripe for bottom-fishing across the board as the sector lacks fresh catalysts over 1H15 while sector risks are outweighing rewards, unless investors have more than 9-12 months investment horizons. Hopes of a pre-GST demand rally have been squashed by buyers’ wait-and-see attitude and tighter lending liquidity, which will unlikely abate in 1Q15. Developers are likely to see flat to declining sales over 2015 and even affordable players will not be spared, meaning there is another 1-2 more quarters of earnings downgrades by consensus. Our analysis indicates that the 2-year mini bullcycle for the sector is over i.e. the KLPRP index is expected to underperform the FBMKLCI over 2015. There is also risk of a structural de-rating in the sector due to GST where secondary properties may steal the limelight away from prim ry ones; we will have to reassess the situation post GST implementation. Ironically, in a challenging market, it will give way to more landbanking and is likely to be more visible in 2H15. This also increases the odds of more cash calls for developers with a higher-than-average (0.3x) net gearing level. The sector will be volatile over 1H15 and we advise investors to be selective. We have trimmed most of our TPs and some of our calls on the back of earnings/sales downgrades. Our TOP PICK is SPSETIA (OP; TP: RM3.95) premised on potential M&A news and bullet recognitions from its overseas projects. Those with pending M&A activities like IJMLAND (AO; Offer Pr: RM3.55) and SUNWAY (OP; TP RM3.65) are also relatively safe bets. While we still like small-mid cap players like MATRIX (OP; TP: RM3.05) and HUAYANG (OP; TP: RM2.20), we think there will be more compelling entry points post GST implementation as much of the negatives would have been priced in.

House price growth has tapered off significantly. We observed that 3QCY15 HPI growth had tapered off to 4.6% from 8.4% in 2QCY14, which is below its 10-year average growth rate of 6.1%. Clearly, the cooling measures have been effective in reigning property price increases. We view the slower growth in HPI positively as it could potentially imply less likelihood of more stringent property measures being introduced moving into 2015.

Residential volumes improved marginally. 9MCY14 residential transacted volume for Malaysia was up by +3%, YoY, (compared to -14%, YoY in 9MCY13), with transacted values coming in higher YoY as the Malaysian average residential transacted price per unit rose by +15%, YoY to RM332k/unit. The positive growth in residential transacted volume despite a higher average transacted value indicates that the market has somewhat adjusted to the higher price environment or what we call ‘normalization of prices’. We also wonder if there is a pick-up in secondary property transactions since overall residential transacted volumes has risen while quite a number of our developers under our coverage have not been able to meet their targets for the year or have reduced targets, resulting in flat to declining sales growth over 2014. We continue to reiterate that a “pre-GST demand rally” is not likely to happen due to tight lending liquidity while buyers are adopting a wait-and-see stance on the back of a shakier economic outlook.

Source: Kenanga

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