It was a mixed bag of results for the 4QCY13 reporting season. So far, the KLPRP index has outperformed the FBMKLCI YTD 2014, which reaffirms our OVERWEIGHT stance on the sector. Developers under our coverage have readied themselves by tailoring most of their launches towards the affordable housing or landed residential market where demand tends to be more genuine in terms of buyers profiles, hence resilient against the tightening measures. We expect a stronger 2H14, especially on the back pre-GST buying and pent-up demand as launches have been quite subdued so far, implying better take-up rates for more mass market skewed launches. Developers’ valuations are currently trading between troughs to average levels as most negatives have already been priced-in. Hence, the high opportunities for rebounds. While we have re-based our FD RNAV discount rates at average levels, potential upsides are still attractive at >10% total returns for most stocks under our coverage. Our TOP PICK is SUNWAY (OP; TP: RM3.33) while our other preferences are IJMLAND (TP RM3.31), MAHSING (TP: RM2.45) and MATRIX (TP RM4.80).

KLPRP has outperformed the FBMKLCI. Last reporting season saw a mixed bag of results (refer to 4-Apr-14 report for details). Landbanking has been relatively quiet at the moment although we gather that land prices have not eased but is levelling. New launches have also been relatively quieter over the last three months. Even so, the KLPRP index’s YTD returns are 4% and have outperformed the FBMKLCI -2% YTD returns which reaffirms our OVERWEIGHT call on the sector. Stocks which have exceeded performance of the KLPRP index are (by descending order of returns) IJMLAND, MATRIX, UOA, IOIPG and SUNWAY of between 6% - 17% YTD gains. We note that these developers have extremely light balance sheets (IJMLAND, UOA, MATRIX), provide strong dividend yields (UOA, MATRIX), have high exposure to townships / affordable housings and non-property catalysts (e.g. Sunway’s construction arm will likely be a large beneficiary of MRT2 contract awards). Notably, we have maintained OUTPERFORM on these stocks over the last quarter and identified IJMLAND and SUNWAY as our preferred choices during our last sector report (4-Mar-14).

Most of the bad news flows could have been priced-in as reflected in near historical low For large cap developers (>RM1b market cap) under our coverage, most are trading close to or at trough levels in terms of Fwd PER/PBV; the exceptions are (i) SUNWAY which is trading at average levels as a beneficiary of construction news flow, (ii) UOA which is trading at average levels due to its high dividend yields, (ii) MATRIX which is trading at near peak levels thanks to their strong balance sheet and full exposure to affordable/industrial segment. In terms of discount to FD RNAV, most developers are trading at trough to average levels. As for small-mid cap developers (<RM1b market cap) under our coverage, these developers are trading at average to peak levels in terms of Fwd PER/PBV while discount to FD RNAV are at average levels.

We expect a better 2HCY14. We note that developers have been holding back launches while buyers are adopting a ‘wait-and-see’ stance. Notably, unbilled sales are extremely strong at 1 to 1.5 years (based on forward revenue). Going forward, most developers are estimating flat to 10% YoY growth in sales due to the more challenging landscape. Most developers believe that 2HCY14 will see strong pick-up in demand due to pre-GST buying pressure and pent-up demand given that new launches have been few over the last few months. New launches will likely start after Apr-2014 and most developers have lined up plenty of affordable housing launches (RM800k/unit and below) for the year. However, note that in the next results season, we do expect to see softer sales as 1QCY14 will see the full impact of the Budget-2014 measures. Nonetheless, by the time 1QCY14 sales are reported i.e. by 2QCY14, more new launches skewed towards affordable housings would have been released with positive take-up rates, hence providing the recovery base for the second half of this year. We also expect landbanking activities for affordable housing to pick up momentum in the next 6-9 months.

Maintain OVERWEIGHT. We are rebasing our valuations of developers to reflect historical average levels. The exceptions are IJMLAND, UOA, and MATRIX as we award lower-than-average FD RNAV discount rates due to their virtual or net cash position, strong exposure to affordable housings in prime locations (refer overleaf for details). Even after the rebasing of valuations, most of the developers under our coverage still have >10% total returns, except for SPSETIA (MP, TP: RM3.03), so we continue to maintain OUTPERFORM on UEMS (TP: RM2.60) , IOIPG (TP: RM3.25), MAHSING (TP: RM2.45), SUNWAY (TP RM3.33), IJMLAND (TP RM3.31), UOADEV (TP RM2.25), CRESNDO (TP RM3.15), HUAYANG (TP RM1.96), MATRIX (TP RM4.80). Our TOP PICK is SUNWAY as they are the beneficiary of the MRT2 news flow and is targeting the highest strongest construction orderbook replenishments of RM2.5b (70% external contracts) for FY14. We believe this is achievable considering their strong track records and technical know-how via its Virtual Design and Construction system, not to mention that it managed to secure RM2.2b (70% external) worth of contracts in FY13, being the largest orderbook replenishment contractor. In terms of property development, 80% of launches for FY14 are geared towards products priced between RM500k-RM1m/unit, which is digestible by the market. Our other 2QCY14 preferences are (i) IJMLAND for its light balance sheet and large affordable housing exposure, (ii) large cap developer laggards like MAHSING which is still focused on Klang Valley affordable housings, and (iii) MATRIX for its light balance sheet and mass housing play in the Greater Klang Valley.

Source: Kenanga