Mixed bag 3QCY12.Developers' earnings were mostly inline (e.g. MAHSING, IJMLAND, HUNZPTY, CRESTBLD). SPSETIA and UOADEV came in above expectations and UEMLAND was below. Only UEMLAND missed its sales target due to launch delays (e.g. Teega, Angkasaraya) but share price was buoyed by positive news flow (e.g. Ascendas tie-up, Motorcity). SPSETIA exceeded its FY12 sales target by 5% while UOADEV achieved our FY12E year sales target within 9 months; hence we revised up earnings accordingly by 8% and 7%, respectively. 

High base effects.Over the last few years, developers have been targeting strong 10%-30% YoY growth in sales given strong liquidity, promotion schemes (e.g. DIBS, rebates), low interest rates and lack of investment alternatives. Impact of tighter real estate policies (e.g. mortgage assessment on net vs. gross pay, RPGT hikes to 10%-15%, LTV caps on 3^rd  home purchases) was felt this year; 1) HPI index has eased over 3Q12; 2) KLPRP YTD return of 4.6% was lower than FBMKLCI's 7.9%; 3) 10M12 loans approval was soft (-3.1% YoY) while 10M12 loans applications was unexciting (+3.4% YoY). This goes against the grain of sizeable developers under our coverage, which have chalked-up record sales/earnings this year, implying it was a fight for market share instead of benefiting from a growing pie of demand. It also appears the sector is largely policy driven since developer's Fwd PBV valuationbands were tighter this year (-0.50SD to +0.25SD) vs. last year (-0.5SD to +1.0SD). Sizeable developers (those with >RM3.0b sales target) are now facing a 'high base' effect, where future sales growth needs to be driven by larger catalytic projects, which can be achieved by aggressive overseas expansion or local landbanking in growth areas (e.g. Johor). SPSETIA and MAHSING have proposed cash calls to fuel their next stage of growth; this could be a prelude for other developers' cash call exercises.

Johor, the next growth driver. The Iskandar Malaysia (IM) play has also gained momentum with many Johor projects chalking-up record sales this year as employment and population factors come through; in fact, if UEMLAND had launched Teega@Puteri Harbour earlier on, it would yield FY12E flat YoY sales growth, oppose to an expected YoY decline.  UEMLAND (MP; TP: RM2.28) is the best IM proxy and we will upgrade the stock post GE and its RCPS redemption period(4-Jan) as cheaper entry points could emerge. We expect more catalytic news to unfold in IM, which includes conclusion of China Holdings Pte Ltd, tie-ups with Singaporean developers, Puteri Harbour ferry services and potential announcement of Johor-Singapore MRT.

Be selective in 1Q13.Only MAHSING and SPSETIA have revealed their CY13E sales of RM3.0b (+20% YoY) and RM5.5b sales (+31% YoY) while other developers will provide guidance by early 2013; however, do note that we expect 45%-50% of SPSETIA's FY13E sales target to be driven by overseas projects (Battersea, Australia, Singapore), implying sales from Malaysia could be potentially YoY lower. We reckon many Klang Valley based developers will need to fight harder for a larger slice of the pie and developers with sizeable affordable residential content (<RM600k/unit), reputable branding, strategic locations, as well as, high Johor and overseas exposure are likelier to succeed. SPSETIA is now viewed as a global developer but is unable to enjoy this premium given its liquidity and free-float issues. We like UOADEV  and IJMLAND as their sales base are still manageable (<RM2.0b) while both enjoy a net cash position; these developers are positioned to offer investors; 1) more exciting headline numbers growth; 2) positive news flow with aggressive landbanking. We do not anticipate any near term policy tightening measures while OPR rates are expected to be flat. However, developers share prices are expected to remain ranged-bound in 1Q13 as investors may avoid high-betas given nearing GE risks. 2H13 maybe a more exciting time, since catalytic news (e.g. RRI land and TRX project awards, rail-plus-property plays) are likelier to happen post GE and will be a re-rating point for the sector.   

Source: Kenanga