We reiterate OVERWEIGHT on developers as we are still positive on the sector, especially on Johor plays. Although there are potential negative headwinds from Bank Negara’s cessation of DIBS and Johor property tax on foreign buyers, we believe this will not overly impact demand for the following reasons; 1) there are other developer’s incentive to attract buyers while there is no real tightening of banking liquidity (e.g. 70% LTV caps on 3rd home purchases) to the sector; 2) one-off Johor property tax on foreigners will unlikely deter foreign buyers since Malaysia’s property values are still significantly cheaper than say, countries like Singapore. Based on our checks with those under our coverage, developers are not overly concerned and mentioned that “there are many ways to skin a cat”. So developers’ fundamentals remain intact (e.g. sales targets, earnings, landbanking aims and balance sheet health).

Negatives mostly priced-in... The recent sell-down on the sector has largely priced-in these negatives and admittedly, it will take at least a couple of months for the market to digest the news. We expect Bank Negara to announce its decision on DIBS soon while the Johor property tax news on foreigners will surface by end of the year. Developers may undergo a temporary knee-jerk reaction when the announcements are made, which offers investors an opportunity to Buy-on-Weakness as we are still positive on the sector’s performance in 4Q13. 

…positioning for positive news flow.  We do expect catalytic news like the RTS, HighSpeed-Rail (HSR), TRX awards, more Iskandar news flow while IWH’s listing will be a booster towards late 2013 to early 2014. Additionally, our House views are still bullish on the market and are maintaining its year-end FBMKLCI target at 1800, implying that high-beta developers will likely follow-suit. On top of that, we expect landbanking activities to pick up in momentum since GE has passed given quieter landbanking activities in 1H13; this should lend support to developers share prices.

Reiterate OVERWEIGHT on Developers.  Overall, we recommend a Buy-on-Weakness strategy for stocks with OUTPERFORM calls and those with TPs which offer high total returns. We continue to like  resilient demand plays like affordable housings and Johor industrial properties and is maintaining CALL/TPs on HUAYANG (OP; TP: RM3.52) and CRESCENDO (OP; TP: RM3.56) as they are not exposed to DIBS while their affordable housing segment only caters to locals. 

We also prefer laggard plays like IJMLAND as it has experienced one of the least YTD returns, has limited exposures to DIBS (<10% of on-going projects), lower sales base effect vs. other large developers, net cash position and has catalytic projects in Johor. No changes in CALL/TP for IJMLAND (OP; TP: RM3.50). 

TPs of developers with higher exposures to DIBS (>30% exposure) or foreign buyers market in Johor have been adjusted lower by 0.5SD-1.0SD Fwd PBV notches from previous TP levels; although we do not expect a significant impact on demand, the higher FD RNAV discount is to reflect the perception of potential demand risks brought about by these measures. However, even with our TP reductions, calls are still maintained for these stocks based on their total returns. We reduce TPs but maintain CALLs for the following; UEMSUNRISE (OP; TP: RM4.09), MAHSING (OP; TP: RM3.49) and UOA (MP; TP:  RM2.41). We maintain MP but adjust lower TPs for SPSETIA (MP; TP: RM3.60) and HUNZA (MP: TP: RM2.09).

Source: Kenanga