We took a road trip and visited projects within Pasir Gudang, Flagship D (Eastern Gate Development) of Iskandar Malaysia, Johor (Tropicana Danga Cove, Bandar Meridin East by MAHSING) as well as IJMLAND’s Nasa City project, which is located along the North-South Highway. We also managed to drive by Eco World’s Kota Masai project, which is next to Bandar Meridin East. In view of PETRONAS approving the development of Pengerang Integrated Complex (PIC) which will comprise of RAPID (worth RM53b) and other related facilities, Flagship D will be one of the strongest beneficiaries of this development as it is the gateway into the Pengerang area. The PIC project will take 5 years (up to 2019) to complete and is expected to see a work force of 70,000 people at the peak of the construction stage and 4,000 employees during the operational stage. At this juncture, there are no major developments in the Pengerang/Desaru area. Land sales have been frozen as the area is gazetted for O&G while very few developers have exposures in Pengerang. Developers that have sizeable landbanks near Pengerang are: (i) IJMLAND’s Sebana Cove, which is located next to Pengerang and is earmarked for high-end developments, (ii) UEMSDesaru Development Corp S/B JV project along the Desaru coastal line which is earmarked for highend resorts, (iii) CRESCENDO’s Ambok land which is located between the Senai-Desaru highway and Sungai Lebam which we understand could be a township which may be skewed towards highend market given the river frontage. However, none of them have started any launches as yet, while IJMLAND’s Sebana Cove may see the launching of a very small parcel of high-end residential by 2HCY14. The entire Pengerang/Desaru area is mainly a greenfield area where there no major commercial activities or sufficient residential developments to support the developments at Pengerang. So, we believe that developments in Flagship D will be major beneficiaries of Pengerang.

Our take: Johor’s property market will remain challenging this year, particularly coming off last year’s high base effect. Demand is still lukewarm as take-ups/bookings rates are softer than expected but admittedly, there have been very few offerings this year as developers are adopting a ‘wait and see’ stance until policies are firm (e.g. foreigners’ floor price of RM1m/unit) while buyers are also standing on the sidelines. Most developers believe that the affordable market and landed residential market will continue to see resilient demand. Their concerns lie with the high-end highrise residential market given the influx of Chinese based developers which have the ability to launch a massive number of units at one go. Buyers will be more discerning in terms of location and be very price-sensitive. According to developers, the number of bookings is seeing higher attrition rates of 30%, compared to 5%-10% previously, because of stricter lending requirements, which is also observed in Klang Valley as well.

Developers will need to work harder in terms of pricing and concepts to attract buyers. We expect 1QCY14 sales to be relatively quiet for developers given the lack of new launches and lukewarm responses. Investors will need confirmation of 2QCY14 take-up rates, where more launches will surface, to get a better gauge on Johor’s property demand.

As highlighted in our recent sector report (2 Apr 2014), we highlighted that a lot of the negatives has been priced-in and developers’ share prices should rebound from oversold positions. We have pegged developers’ RNAV discount rates at their historical average levels (except for SPSETIA) which indicate that these developers still have decent upsides. Since our report, developers’ share prices have increased by 3%-13% with the exception of SPSETIA, which is marginally lower by 1%.

While we have OUTPERFORM calls on Johor-based developers like UEMS (OP; TP: RM2.60) and CRESCENDO (OP; TP: 3.15), we believe the recent run-ups have resulted in limited upsides at this juncture while we will only re-rate our valuations when stronger catalysts materializes.

We still prefer Klang Valley-based developers like SUNWAY (OP; TP: RM3.33), IJMLAND (OP; TP: RM3.31), MAHSING (OP; TP: RM2.45) and Eco World (NOT RATED) and may review our TPs again with an upside bias as we await confirmation of take-up rates. We also like mass housing players like MATRIX (OP; TP: RM4.80) and HUAYANG (OP; TP: RM1.96) which have exposures to the affordable market in Johor. We have MARKET PERFORM on SPSETIA (TP: RM3.03) as the stock adjusts to Tan Sri Liew’s departure.

Source: Kenanga