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Wednesday, April 1, 2020

Property Developers - Distressed Basement Valuations

Already grappling with an oversupply imbalance, the property sector is expected to be hit harder now by the deteriorating economic conditions and evaporating consumer confidence. In the midst of the perfect storm, property developers will find it challenging to clear their inventory of completed stocks and achieve forward sales targets. Reflecting the bearish sentiment, the KLPRP Index extended its losses this year, down 37.7% YTD (as of 20 Mar 2020) compared with the benchmark index’s decline of 18.0%.

To get a sense on valuation levels during a market meltdown, we looked back to 2008/2009 when global equities crashed in the wake of the global financial crisis. Back then, the property sector hovered between –1.5SD and –1SD below its historical PBV mean for approximately 11 months. After the recent intense sell-off, the KLPRP Index has overshot to trade at the distressed level of -2.5SD below its mean currently, suggesting a relief rebound is probable.

Even after applying basement PBV multiples at –2.5SD to –1SD below their mean levels to factor in the challenging outlook, our revised target prices suggest there are potential upsides while valuations are poised to revert to normalcy post crisis, as was the case in the past. From a valuation perspective, we are retaining our tactical OVERWEIGHT sector call with our top picks being SIMEPROP (OP; TP: RM0.88) and IOIPG (OP; TP: RM1.21). For trading-oriented investors, we recommend UEMS (OP; TP: RM0.58) and SPSETIA (OP; TP: RM0.86) as potential rebound plays from oversold positions.

The going gets tougher. The Bursa Malaysia Property (KLPRP) Index has lost 37.7% of its value YTD (as of 20 March 2020) compared with the FBMKLCI’s drop of 18.0%. Leading the decliners were SPSETIA (-60.9%), UEMS (-57.5%) and ECOWLD (-55.0%) while AMVERTON (flat) and MAGNA (-0.6%) were the relative outperformers. The bearish performance was mainly attributable to its already weak fundamentals exacerbated further by deteriorating economic conditions and evaporating consumer confidence, in the wake of the Covid-19 spill-over effects and oil price collapse.

Under siege. To be sure, the supply-demand imbalance in the property market is expected to persist. Essentially, the high inventory levels – comprising existing stocks and incoming supply of unsold units still under construction – will remain elevated in the foreseeable future. On the other hand, demand will likely weaken in the midst of the economic fallouts arising from Covid-19 and oil price slump. Hence, property developers will find it increasingly challenging to clear their inventory of completed properties and achieve new property sales targets this year.

Source: Kenanga Research - 1 Apr 2020

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