We are downgrading developers to NEUTRAL from OVERWEIGHT as we think the risk-reward ratio is leaning towards ‘risk’ due to expected minimal catalysts in 3Q14 while there are possible negative headwinds during the quarter, including potential interest rate hikes and further cooling measures in Budget-2015. Expectations of a better 2H14 have been largely priced-in since property stocks have rebounded over 1H14 with most now trading at average valuation levels. Expect the sector to be range-bound in 3Q14. We recommend that investors be selective during the quarter, with emphasis on affordable housing plays and RNAV expansions.
Already rebounded from lows in 1H14. 1QCY14 results were within to below expectations. Most property stocks rebounded from their trough valuations (excl. MAHSING, UEMS, IOIPG, SPSETIA) with KLPRP YTD returns of 10% and average property developers’ share price YTD returns of 15%. More are now trading at average valuations. The market has priced-in ‘a better 2H14’ in terms of take-up rates of upcoming launches and developers’ ability to meet sales targets given that the KLPRP Index outperformance in 1H14. Thus, developers which are on-track to meeting sales performance will see range-bound performance in share prices while those that are behind schedule may experience weaknesses. We think the likelihood of developers exceeding their sales target for the year is very slim at this juncture as banking liquidity to the sector may not loosen up as much as we had hoped for earlier.
Not enough catalysts in 3QCY14, but more risks. We think it will also be quiet in terms of sector catalysts and positive newsflow for 3Q14, save for progress of new launches and take-up rates. Potential interest rate hike which could imply a series of rate hikes, which will affect property sentiment. If there is no rate hike, Budget-2015 (Oct) could be negative if the government/BNM are not satisfied with Budget-2014’s impact on the sector. The market does expect a quiet Budget-2015, but it all depends on whether house prices have levelled. The broad market is expected to correct as well, which does not bode well for high-betas like developers.
Downgrade to NEUTRAL from OW. Given the rebounds in 1H14, the risk-reward ratio is no longer favourable while 3QCY14 could be clouded by uncertainties. We recommend that investors be stock-selective in 3Q14 as it is likely a range-bound quarter. Our new CALLs/TPs for developers under our coverage are: UEMS (OP; TP: RM2.40), IOIPG (OP: TP: RM2.95), SPSETIA (MP; TP: RM3.30), SUNWAY (OP; TP: RM3.70), IJMLAND (ACCEPT OFFER; TP: RM3.55), MAHSING (OP; TP: RM2.45), UOADEV (MP; TP: RM2.13), TROP (MP; TP: RM1.65), MATRIX (OP; TP: RM4.80), CRESNDO (OP; TP: RM3.15), HUAYANG (MP: TP: RM2.15). Our TOP PICK is SUNWAY for its strong construction newsflow and higher valuations arising from SREIT while our other preferred pick is MATRIX for its affordable housing play in the Greater Klang Valley space and decent dividend yields of 5.9%. Investors should also look into RNAV expansion plays or turnaround stories in the small-mid cap space for trading plays. We have Trading BUY calls from our OR products: Global Oriental (FV: RM1.23), SBC Corp (FV: RM3.24), SUNSURIA (ex-all FV: RM1.22 / cum-FV: RM2.93), and TITIJAYA (FV range: RM2.95-RM3.32). Laggards (UEMS, IOIPG, SPSETIA, MAHSING) may not be appealing during this period unless investors are taking a long-term view given bottomed-out valuations or trading buy positions for M&A angles (e.g. SPSETIA).
4QCY14 could be better. If Budget-2015 is quiet, the sector will be re-rated. Pre-GST demand and industry newsflow (e.g. HSR, RTS, MRT, landbanking, new launches) will also be more obvious. If there are no major interest rate hikes or harsh Budget-2015 measures, we may look to upgrade the sector to OVERWEIGHT again in 4Q14.
KEY POINTS
House Price Index: Growing at a slower rate
House prices continue to rise but at a slower rate. The House Price Index (HPI) for 1Q14 indicated that Malaysia’s house prices rose by 8% YoY, which is slower than last year’s average of 11% YoY growth, and is the first time HPI growth was below 10% since 3Q11. It indicates that Budget-2014 measures have been effective in slowing house price momentum. But it could also be due to less new launches during the period as both buyers and developers adopt a ‘wait-and-see’ attitude. BNM appears to be less concerned at the moment although we believe they are monitoring house prices movements closely and would not be surprised if they prefer to see HPI growth rate to be slower than current levels given that the 10-your average annual growth rate for HPI is 6%. We also note that Johor has seen the most results as its HPI growth tapered at 11% in 1Q14 vs. 21% last year.
The question we need to ask is; will HPI growth gain momentum when new launches pick-up in 2H14? We take the view that with cost-push inflation and a high chance of pre-GST demand rallies, HPI growth is likely to remain above its 10-year average.
Residential Transaction Volumes and Value
Transacted volume still weak. JPPH has released its 1Q14 data. We observe that Malaysia’s residential transaction volume declining momentum has slowed down to -1% YoY compared to -10% YoY in 2013. In terms of value transacted, Malaysian residentials saw a 20% YoY increase in 1Q14 on the back of more transactions of units at higher values while HPI is up by 8% YoY, causing the average house price transactions to rise by 20% YoY to RM330k/unit. The main drag on Malaysia’s residential volume was Klang Valley it is largest driver (30% market share). Johor and Penang showed decent performances with 1Q14 residential transactions volume increase of 15% and 2% YoY, while transacted value increased by 63% and 22% YoY, respectively. The overall trend was expected given the impact of Budget-2014 measures and tighter lending environment.
“Affordable homes”
Definition of ‘affordable homes’ is changing. The price range of RM250k-RM500k/unit is becoming a bigger proportion of residential transactions. Developers are working hard to increase offerings of ‘affordable homes’, but the terminology is used quite loosely as industry players have various definitions and in urban areas, they define it as either; (i) below RM500k/unit, (ii) between RM500-700k/unit or, (iii) in some cases, those below RM1m/unit. While the definition of affordable homes should veer closer to Malaysia’s average house price of RM330k/unit, this would be an issue in key property zones like Klang Valley, Penang and Johor where land price has soared substantially over the last 5 years. Developers are not to be entirely blamed for the price increases as cost of construction has also increased due to subsidy rationalizations and general inflation as well as labour shortages and higher land values. Some developers are also pricing in impact of GST for projects that will cross-over the GST implementation date (Apr-15). Investors should also note that the cost structure of developers have also changed a lot over the last 5 years as marketing expense components are becoming more prominent. In fact, most developers have either maintained or are seeing slight development margin compressions.
Implications of landbank replenishments. Over the last 12 months, landbanking newsflow is considerably less compared to previous years. It is tougher for developers to landbank as land owners have strong holding power and are demanding for higher and higher prices. It is more so the case when demand is most for affordable homes, meaning that developers have to focus on volume plays rather than high-value margin ones, which causes them to use their landbanks more quickly. We reckon it will be tougher for the industry to landbank at an aggressive pace if the market continues to demand affordable homes. So we need to bank on developers with huge tracts of landbanks at historically low costs to ensure sustainable product offerings and margins.
Too much supply?
Residential launches on the rise. Overall, the number of new residential launches in Malaysia is on an increasing trend since 2012 as it is driven by states like Johor, followed by Kuala Lumpur and Penang. Selangor continues to see declining trends of new launches. We have gone into more depth to gauge the supply situation of each residential segment in each key property state.
Klang Valley: New launches of high-rise residentials have been on a flattish trend while landed homes are on a decline. In Klang Valley, the volume of new supply of high-rise is about 60% more than that of landed homes. The trend is expected and will continue as landbanks in Klang Valley has increased significantly and affected urban affordability. In the last few years, developers concentrated on maximizing value of land while ensuring ‘affordability’ by launching smaller units. Landbanks for landed homes are tough to come by unless one ventures to the outer radius of Klang Valley (e.g. Bangi, Semenyih, Canal City, Rawang). The trend is expected to continue
Penang: The volume of new launches of high-rise residentials has been flattish while landed homes are on a growth trend. This can be explained by the shift in focus towards the mainland from the island, thanks to the completion of the Second Bridge. On the mainland, land prices still allow for landed homes at affordable prices. In terms of new supply, high-rise residentials growth is far more aggressive than landed homes. For the last few years, developers have not been rolling out many new launches on the island as their attention had switched towards Johor. Since Johor has turned challenging, developers are going back to other states like Penang to drive sales targets.
Johor: Interestingly, the number of new launches for landed homes is far more than high-rise residentials; this is also observed in the new supply data as the number of units for terrace homes is almost double that of high-rise residentials.
This is atypical as Klang Valley, a state with vast landbanks, sees opposite trends. Over the last few quarters, the pace and volume of new launches for landed homes have outpaced that of high-rise residentials. This is not surprising considering that Johor’s appeal has been mainly landed residentials for both Singaporeans and locals. In terms of new supply, both high-rise residentials and landed homes have been on an increasing trend since 2011 although we note that the growth rate of highrise residentials is more aggressive than landed residentials; we attribute this to the sharp rise in Johor’s land cost, causing more developers to focus on high-density projects. Most local developers are concentrating on rolling out more landed home offerings, so we reckon that the higher growth rate of high-rise residentials is driven by foreign-based developers which prefer waterfront developments or those in catalytic areas (e.g. Medini).
Too much supply of homes? We monitor ‘cumulative absorption’ (CA) rates of residential properties and so far, Malaysia has managed to keep a healthy level as CA rates remain below the 10-yr average of 25x in 2013. Other states like Penang and Klang Valley are also seeing similar ratios. As usual, Johor continues to be the weakest given its CA rate of 32x although it has been improving since the 2008 high of 36x. Note that we define absorption rates as total supply over total demand i.e. the higher the rate, the lower the absorption.
We further refined our analysis to assess whether demand can keep up with the incremental supply of residential units and believe that a ratio of 1.0x is ideal, i.e. increased supply for the year can be fully matched to annual units transacted, which we coin as ‘incremental absorption’ (IA) rates. Based on our new analysis, Malaysia is healthy as the IA rate of 0.6x in 1Q14 is still below 1.0x. Residential demand in Klang Valley remains very strong with an IA rate of 0.4x in 1Q14. For many sizeable developers, Klang Valley will remain a major driver as urbanization rates are still very high. However, Johor and Penang are seeing that new supply is outpacing demand as suggested by the weaker IA rates of 1.1x each in 1Q14. If Johor and Penang continue to see IA rates above 1.0x, we expect sizeable developers to remain focused on Klang Valley and other new growth corridors (e.g. Sabah, Seremban) or overseas expansion.
Future growth momentum may slow down. Clearly, the situation is challenging as developers cannot solely bank on Klang Valley for strong growth while other states like Johor may see unfavourable demand-supply dynamics. It will be tougher for developers, particularly sizeable ones, to continue a double-digit sales growth momentum in the next few years.
Which states are gaining market share?
In terms of residential transaction volumes, Klang Valley has lost market share, although it still remains as the major driver of Malaysia’s residential transactions. States that has lost market share are (i) Klang Valley, which makes up 30% of Malaysia vs. its 5-year average of 37% (ii) Penang, which makes up 7% of Malaysia vs. its 5-year average of 9% (iii) East Malaysia, which makes up 7% of Malaysia vs. its 5-year average of 8%. States that gained market share are (i) Johor, which makes up 15% of Malaysia vs. its 5-year average of 12% (ii) Negeri Sembilan, which makes up 9% of market share vs. its 5-year average of 5%. It is not surprising to see Klang Valley and Penang losing market share because: (i) land prices has risen in both states, making it tougher for developers to landbank, (ii) Penang already has limited landbanks on the island and demand is now compensated by the mainland, (iii) established developers have hit a ‘high-base’ effect in Klang Valley where their group sales growth requires their other states and/or overseas projects to achieve sales growth. Negeri Sembilan has also moved into the spotlight, thanks to Seremban, which has benefitted from the Greater Klang Valley play and renewed industrialisation; this has been beneficial to developers like MATRIX (Bandar Sri Sendayan) and IJMLAND (Seremban 2). In Johor’s case, the increased market share is explained by: (i) the Iskandar Malaysia story, better G2G collaborations between Malaysia and Singapore, PETRONAS RAPID and other O&G related developments that have attracted non- Johorian locals and foreign buyers to the market, (ii) Johor’s awakening after more than a decade and is playing catch-up with Klang Valley in terms of product offerings and pricings. The key question is whether Johor can sustain such demand momentum given concerns of strong incoming supply of high-rise residentials.
Johor: No more land reclamations please!
Johor feels the blues. The Iskandar Malaysia story has lost its steam given the: (i) the influx of China-based developers (Country Garden, Guangzhou R&F Properties, Greenland Group) which have the capabilities of flooding the market with highrise residentials, as seen with the volume of units launched by Country Garden Danga Bay project where they have launched most of the 10,000 units of condominiums at one go, (ii) threats of more property and land supply due to Country Garden and KPRJ’s plans to reclaim c. 5000ac along the Straits of Johor near the Second Link even though Johor has ample landbanks for development, (iii) unfavourable state policies including changes of working days and weekends while recent amendments to the Johor Housing and Property Enactment 2014 has cast more confusion amongst investors, (iv) lack of planning control with regards to high density/plot ratios given to developers with waterfront projects. This has resulted in very weak responses to high-rise condominiums (e.g. UEMS’s Almas @ Puteri Harbour). Landed residentials continue to fare well in all price segments as buyers shied away from high-rise projects. Some examples are Emerald Bay @ Puteri Harbour, which has seen almost full take-up rates while mass housing townships continue to see strong take-ups.
Singapore’s buy-in is still strong. Positively, it appears the G2G relationship between Singapore and Malaysia is still intact. We are glad that Singapore has expressed concerns about the land reclamation of c.5000ac at the Straits of Johor and that Malaysia has agreed to provide Singapore with the relevant information for further studies. We view that the reclamation would be devastating for Johor, especially UEMS Nusajaya and Khazanah’s Medini area, and we really see no need for additional land as Johor still has ample amounts of landbanks and capable local developers. We hope that ‘international’ pressure will put an end to these reclamation plans or at least moderate the reclamation to ‘bite-sizes’ over a longer period of time and hope to see the local state government showing more support to Malaysian developers. Both countries are working towards the High-Speed-Rail (HSR) and possibly the Rail-Transit-System (RTS) which will link Johor to Singapore’s MRT.
However, news flow on alignments will unlikely to surface in the near-term but more possibly next year. Going forward, developers which have large exposures to Johor are focusing on a few strategies; (i) competitive pricing points for high-rise residentials, (ii) landed residentials, and (iii) office/industrial developments. Save for UEMS, most developers are expecting Johor’s contributions to sales to be less than last year.
We believe the Johor story will remain subdued until there is more news on the infrastructure plays and clarity on the massive reclamation project. We would also like to see more active housing policies which will manage supply of residentials in the state. If Johor is brought closer to Singapore with the G2G relationships and connectivity plays, it is safe to deduce that Johor will start to narrow pricing gaps with Singapore and will eventually mimic Singapore’s more volatile property price movements. If so, Johor should also adopt similar property supply controls as seen in Singapore. Stocks like UEMS, have already been heavily sold down and are trading at trough levels; but we expect that these stocks will continue scrapping the bottom until connectivity catalysts re-emerges and/or potential housing oversupply is addressed.
Upcoming Negative Headwinds
Is BNM happy with impact of Budget-2014 measures? The Star recently reported (23/6/14) that BNM stated that there was no conclusive evidence of a housing bubble in the country. The recent HPI and transaction data indicates that measures are working. The article highlights BNM statements that: (i) the growth of borrowers with three or more loans has dropped to 4% from a peak of 15.8% and only accounts for 3% of housing loans, (ii) 84% of home loan borrowers had one outstanding housing loan, (iii) banks’ excess capital buffers is high at more than 5x of the expected losses in the event of a probability default of 10% (about 4x the current rate) and adverse correction of house price by 40%, (iv) impaired housing loans remains low at 1.4% (1.5% in 2013 and 2.3% in 2011), (v) proportion of housing loans with LTV of more than 70% is now lower at 46.6% (2012: 50.1%), and (vi) borrowers are less inclined to dispose of their properties if property prices fall as they are taking a medium to long term view. We are also glad to hear that BNM attributes the pricing mismatch in the market to rising land prices and construction costs, which causes developers to focus on higher-end properties where margins are better. It appears BNM is not as concerned about the property market, especially when it sees results of the cooling measures. This does set the stage for a quiet Budget-2015 for the sector, although it is tough to say at this juncture.
Risk of interest rate hike. The market expects that there will be a 25 bps OPR rate hike during the upcoming Monetary Policy Committee (MPC) meeting on 10th July. However, our in-house economist is taking a different view as he is expecting that there will be no rate hike. He believes that interest rate hikes may not be the best solution to overcome rising inflation as it is driven by cost-push factors rather than it being demand fuelled. The nation is also moving towards the GST implementation timeline of Apr-2015, which will inevitably causes another round of cost-push inflation. Based on our recent Economic Viewpoint report (“Malaysia Interest Rate Outlook – At A Cross Road”, dated 20/6/14), he also highlighted that in the past, when BNM raises interest rates, it will be done in small increments of 25bps each time and this can happen in subsequent MPC meetings or within a 3-6 months’ timeline i.e. a 25 bps rate hike in July will likely be met with another rate hike. Our Economist also believes that a total of 50 bps rate hike within six months maybe “too much too soon” as it would raise cost of funds and adversely impact large infrastructure projects.
A double-edge sword. Whether there is a rate hike or not, it appears that 3QCY14 will be challenging for property stocks given the following reasons; What happens to the property sector if there is a rate hike?
An increase in 25 bps in the OPR will see a similar increase in BLR. Assuming average lending rates (AVL) increase by 25 bps, monthly instalment commitments will increase by 3% which we think is a digestible amount. But as highlighted earlier, it may be a series on small incremental rate hikes. In our worst case scenario, if rate hikes over the next 12 months of up to 100 bps, this will increase monthly instalments by 12% which is a significant impact. To illustrate this, Person A, a first home owner, who has bought a RM500k/unit house prior to a 25 bps rate hike should be drawing a net pay of RM4.6k/mth assuming 50% mortgage-net income ratio. If Person A buys a RM500k/unit home after the 25 bps (100 bps) rate hike, the buyer should be earning RM4.7k/mth (RM5.1k/mth) to qualify for the loan. It is clear that more than a 50bps rate hike will price out many first home buyers, which does not bode well for the mass housing sector as affordability issues will be exacerbated. Also, note that rate hikes will squeeze existing home loan owners’ ability to buy other homes; BLR does move in tandem with OPR, implying higher effective interest payment required for those with home loans. While we think that the initial 25 bps will not impact the physical market significantly, it will affect property stock sentiment especially if it strongly hints that there will be subsequent hikes and if so, we can expect property stocks to take a beating.
Affordability has weakened. Over 2013, we observe that Malaysia’s overall affordability has declined as the increases in house prices have outpaced that of income levels. Malaysia’s home affordability has weakened against its 10-yr average of 24.5%. If there is a 25bps hike in lending rates, the affordability index remains below the conventional levels (mortgage being 30% of gross income) but will breached +1SD@10-yr average at 26.5%. In Klang Valley, where average house price transactions are 57% higher than the national average, affordability of double-income households are also seeing similar trends as Malaysia. However, in Klang Valley, a 50bps hike in lending rates will see affordability index breach the +1SD@10-yr average at 21.3%
Will lending rates change if there is an OPR hike? Not necessarily. It is normal to assume that a hike in OPR will have a similar impact on BLR and thus, lending rates. This was the case back in 2008-09 when BNM lowered OPR from 3.5% to 2.0% while AVL also fell from above 6.0% to a low of 4.8% during the same period. However, when BNM raised OPR to 3.0% over 2010-11, AVLs trended below 5.0% and has remained below this level since late 2010. From 2010 to today, we have been seeing wider lending spreads as banks became increasingly competitive. Currently, lending spreads to BLR are at a high of -2.0ppt vs. the last 2 year’s average of -1.9ppt. If banks maintain lending spreads to the BLR, it would mean that an OPR hike will result in higher lending rates, which would have a negative impact as highlighted above. If banks decide to widen lending spreads further, it will be good for new home buyers. There is a possibility that banks will widen their lending spreads to maintain AVLs at current levels to drive loans growth. But as mentioned earlier, it will still impact those with existing home loans, which limits their ability to take on another loan.
What happens to the property sector if there is NO rate hike?
Will the absence of rate hikes mean more sector specific measures? If the upcoming MPC meeting results in no rate hike, we think that property stocks may see slight upward share price movements since the market expected otherwise. For the physical market, we think it will be ‘business as usual’ until Budget-2015 announcements. Industry players are banking on a quiet Budget-2015 after a very harsh round of Budget-2014 measures. Our concern is that in the absence of a rate hike, BNM and the government may be looking at sector specific measures to reign in the property sector if: (i) HPI growth does not slow down, particularly when more new launches surface in 2H14, (ii) if household debt continues to worsen from the record high of 86.8% in 2013. For now, it appears that BNM is happy with the results of Budget-2014 measures, as highlighted earlier. But we reckon that the government and BNM need to see more of such data points before deciding on whether more tightening measures are required or not. This period of uncertainty will cast a cloud of doubt on investors’ sentiment. So, if there are no rate hikes, there could be a run-up in property share prices post the MPC meeting but expect it be short-lived as Budget-2015 will be around the corner.
Budget-2015. At the best case scenario, we are hoping for a quiet Budget-2015. Potential measures include: (i) higher stamp duties across the board which would also hurt genuine buyers, (ii) higher stamp duties for those that own more than 2-3 properties onwards although this is not feasible as there is no country-wide tracking system, and (iii) banking measures including lower LTVs. We will elaborate more on potential Budget-2015 measures closer to Oct-2014.
Banking liquidity to the property sector
Buyers’ cautiousness is expected. It is not surprising to see that monthly loans applications for both residential and nonresidentials have been on a declining YoY trend as the market feels the effect of Budget-2014 measures. It was expected that buyers’ sentiment would be weak for the 6-9 months period after Budget-2014 measures were announced as many adopt a ‘wait-and-see’ stance on hopes of weaker prices. However, the HPI indicates that prices are still on an uptrend while our checks on the ground indicate that secondary prices are not weakening either.
Buyers’ sentiment to improve in 2H14. We still expect a pre-GST demand rally as we approach the GST implementation timeline of Apr-2015. Also, we observe that developers have been relatively quiet in terms of new launches in 1H14 as they ‘wait-and-see’ as well, which could create a ‘pent-up’ demand scenario in the near future. But it all depends if banks will loosen up liquidity to the sector.
Expectations of easing banking liquidity to the sector by 2H14. It has been tougher to secure housing loans this year compared to the last 2 years. As a gauge, the attrition rate from bookings to SPA sales is now about 30%-40% compared to less than 10% in the last two years. The hurdles include: (i) banks are increasingly stricter with regards to mortgage to loan exposures, (ii) lower margin of finance due to transparency measures which account for items like rebates/freebies when applying for loans. However, the market believes that banks will be hungrier for loans growth in 2H14. If so, this would really support the theory that take-up rates will improve in 2H14.
In terms of loans approved for residential properties, we observe that flattish to declining YoY trends can last between 6 months to 1 year which was seen back in 2009 (post GFC) and 2012 when BNM implemented mortgage assessment on net rather than gross pay. During these periods, we also note that property stock prices either took a beating or consolidated (refer to chart below).
Loans approvals have bearing on property share price performance. While the months of Jan-Apr 2014 are still seeing positive growth, loans approvals have been losing growth momentum with YTD-Apr 2014 data being only up by 2% YoY. Based on historical trends, the flattish to declining growth period could last another few months or at the worst case, end of the year. As mentioned, this may have bearing on the performance on property stocks and we could be seeing a period of consolidation.
Expectations of a better 2H14 been priced-in?
KLPRP Index has rebounded in 1H14. Most property stocks (large caps) under our coverage were at trough valuations earlier this year as Budget-2014 negatives were priced-in during 4QCY13. In our earlier sector reports, we had anticipated that 1H14 will see property valuations rebound to historical average levels, which did take place even though landbanking activities and new property launches have been relatively quiet over the last six months. The KLPRP index registered a higher YTD return of 10% vs. its 4% YTD gain back in 21-March-2014. The KLPRP has also outperformed the FBMKLCI’s 2% YTD returns. In 1H14, (i) large-cap developers (>RM1b market cap) have registered an average YTD return of 16% vs. 10% returns in 1Q14, (ii) small-mid cap developers (<RM1b market cap) saw 15% YTD returns vs. 6% returns in 1Q14. The range of returns for developers that outperformed the KLPRP index performance in 1H14 delivered YTD returns of 11%-77%.
Developers under our coverage that outperformed KLPRP index performance are (descending order of returns) IJMLAND, TROP, MATRIX, HUAYANG and SUNWAY of 11% to 38% YTD gains. We note that these developers experienced higher news flows (IJMLAND, TROP), high exposure to the affordable market and provide strong dividend yields (MATRIX), exceeded earnings expectations (HUAYANG) while stocks like SUNWAY could have benefited from IJMLAND’s privatization news flow as investors seek replacements. Notably, we have maintained OUTPERFORM on these stocks over the last quarter and identified IJMLAND, MATRIX and SUNWAY as our preferred picks in our 2Q14 strategy sector report (2-April-14).
Developers that underperformed the KLPRP index are UEMS, MAHSING, IOIPG and SPSETIA with YTD returns of -11% to 0.7%. These are laggards due to area specific risks like Johor (UEMS), consecutive earnings disappointments (IOIPG), lack of long-term management direction (SPSETIA) and fear of ‘high-base’ effects (MAHSING). These stocks are trading close to trough valuations in terms of valuations (Fwd PER, historical RNAV discounts) while most have bottomed-out at current prices. However, these stocks lack near-term excitement while the highlighted issues may weigh on share prices. Nonetheless, these are well-known large cap developers which may appeal to long-term investors.
Newsflow likely to be quiet in 3Q14. In terms of industry newsflow: (i) expect infrastructure plays (e.g. HSR, RTS) to only surface towards year-end, (ii) major M&A plays have already taken place in 1H14 (e.g. EcoWorld, IJMLAND) and even rumblings of potential listing of IWH will likely materialize by year end, at the earliest. The only major newsflow for the quarter could be SPSETIA which could see potential M&A plays which may involve SIME DARBY. So the market will focus on takeup rates or confirmation of ability to meet sales target. Emphasis will be on landed residentials or affordable homes. Even though there is expectations that banks will be hungrier for loans growth in 2H14, sales data will take longer to materialize given the lower conversion rate of bookings to SPA sales; this may also cause developers to delay their pipeline of launches.
“Expecting a better 2H14”…is it a worn-out mantra? For the last 6 months, new launches have been few while momentum of general take-up rates has been slower than previous years. So, analysts have been banking on a ‘better 2H14’, citing reasons of pent-up demand after a quiet 1H14, more clarity on interest rates post MPC meeting, pre-GST demand rally and loosening banking liquidity. We reckon that the sector has priced-in a better 2H14 given the outperformance of the KLPRP in 1H14 while more property stocks’ valuations are at historical average levels. If developers show indication of meeting their sales targets, we reckon that share prices may not react as strongly as ‘expected’; but on the flip-side, if there are hints of developers missing sales targets, we reckon share prices may react negatively. Against a backdrop of weak news flows, we reckon that the impetus of higher property share prices is unlikely against more uncertainties in 3Q14.
Valuations
Valuations have moved up to average levels. Most developers have improved in terms of valuations compared to earlier this year (-0.5SD to -2.0SD range) as many are trading at closer to its average levels in terms of Fwd PER/PBV and historical RNAV discounts. The laggards are UEMS, IOIPG, SPSETIA and MAHSING which are mainly large caps (>RM1b); (i) UEMS has been affected by the negativity arising from Johor; (ii) IOIPG has disappointed investors in terms of earnings and sales for 2 consecutive quarters, (iii) SPSETIA’s long-term leadership plans needs to be ironed-out or catalysts like potential mergers with PNB/SIME property units before the stock can re-rate convincingly, (iv) MAHSING has met investors’ expectations in terms of earnings and sales but investors have been shying away from the stock given its high sales target base of RM3.6b. Popular affordable plays like HUAYANG, MATRIX and CRESNDO are seeing average to peak valuations.
In general, we reckon that developers should trade closer to its average historical levels as sector dynamics are far from a ‘bull-run’ scenario, unless there are selective plays (e.g. affordable housings, RNAV expansions, non-property segment drivers like construction for Sunway). While there is long-term values in the large-cap laggards (UEMS, IOIPG, SPSETIA and MAHSING), we believe their share prices will be subdued over 3Q14 or until the sector becomes positive again.
Our take
Risk-reward ratio leans to ‘risks’. We think the market has priced-in ‘a better 2H14’ in terms of take-up rates of upcoming launches and developers ability to meet sales targets given that the KLPRP Index outperformance in 1H14. Thus, developers which are on-track to meeting sales performance will likely see range-bound share prices while those that are behind schedule may experience weaknesses. We think the likelihood of developers exceeding their sales target for the year is very slim at this juncture as banking liquidity to the sector may not loosen up as much as we had hoped for earlier. It will also be quiet in terms of sector catalysts and positive newsflow for 3Q14. Meanwhile the risk-reward ratio is now biased to ‘risk’ given threats of interest rate hikes and uncertainties from upcoming Budget-2015 in Oct-14, particularly if house prices continue to trend upwards. Our in-house strategist also believes that the market could weaken in 3Q14, which would not bode well for developers which are mainly high-beta stocks.
Our new CALLs/TPs for developers under our coverage are; UEMS (OP; TP: RM2.40), IOIPG (OP: TP: RM2.95), SPSETIA (MP; TP: RM3.30), SUNWAY (OP; TP: RM3.70), IJMLAND (ACCEPT OFFER; TP: RM3.55), MAHSING (OP; TP: RM2.45), UOADEV (MP; TP: RM2.13), TROP (MP; TP: RM1.65), MATRIX (OP; TP: RM4.80), CRESNDO (OP; TP: RM3.15), HUAYANG (MP: TP: RM2.15). Refer to Appendix for details of changes in CALLs/TPs.
Downgrade to NEUTRAL from OVERWEIGHT. We recommend that investors be stock-selective in 3Q14 as it is likely a range-bound quarter. Our TOP PICK is SUNWAY for its strong construction newsflow and higher valuation arising from SREIT while our other preferred pick is MATRIX for its affordable housing play in the Greater Klang Valley space and decent dividend yields of 5.9%.
Trading Buy stance and be selective. Investors should also look into RNAV expansion plays or turnaround stories in the small-mid cap space for trading plays. We have Trading BUY calls from our OR products: Global Oriental (FV: RM1.23), SBC Corp (FV: RM3.24), SUNSURIA (ex-all FV: RM1.22 / cum-FV: RM2.93), and TITIJAYA (FV range: RM2.95-RM3.32). As for laggards like UEMS, IOIPG, SPSETIA and MAHSING, investors will need to take more of a long-term view on the stocks as they have bottomed-out in valuations but are unlikely to see strong positive share price movements in 3Q14. Laggards (UEMS, IOIPG, SPSETIA, MAHSING) may not be appealing during this period unless investors are taking a long-term view given bottomed-out valuations or trading buy positions for M&A angles (e.g. SPSETIA). If there are no major interest rate hikes or harsh Budget-2015 measures, we may look to upgrade the sector to OVERWEIGHT again in 4Q14.
Source: Kenanga
Chart | Stock Name | Last | Change | Volume |
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2024-08-31
UEMS2024-08-30
CRESNDO2024-08-30
MAHSING2024-08-30
MAHSING2024-08-30
MAHSING2024-08-30
MAHSING2024-08-30
SPSETIA2024-08-30
SPSETIA2024-08-30
SPSETIA2024-08-30
SPSETIA2024-08-30
SUNWAY2024-08-30
SUNWAY2024-08-30
SUNWAY2024-08-30
SUNWAY2024-08-30
SUNWAY2024-08-30
TROP2024-08-30
TROP2024-08-30
TROP2024-08-29
IOIPG2024-08-29
IOIPG2024-08-29
IOIPG2024-08-29
IOIPG2024-08-29
IOIPG2024-08-29
IOIPG2024-08-29
IOIPG2024-08-29
MAHSING2024-08-29
SPSETIA2024-08-29
SPSETIA2024-08-29
SPSETIA2024-08-29
SUNWAY2024-08-29
SUNWAY2024-08-29
SUNWAY2024-08-29
SUNWAY2024-08-29
SUNWAY2024-08-29
TROP2024-08-28
IOIPG2024-08-28
MATRIX2024-08-28
MATRIX2024-08-28
SPSETIA2024-08-28
SPSETIA2024-08-28
SPSETIA2024-08-28
SPSETIA2024-08-28
SPSETIA2024-08-28
SPSETIA2024-08-28
SPSETIA2024-08-28
SUNWAY2024-08-28
SUNWAY2024-08-28
UOADEV2024-08-28
UOADEV2024-08-27
SPSETIA2024-08-27
SPSETIA2024-08-27
SUNWAY2024-08-27
SUNWAY2024-08-27
TROP2024-08-27
TROP2024-08-27
UOADEV2024-08-26
SPSETIA2024-08-26
SPSETIA2024-08-26
SPSETIA2024-08-26
SUNWAY2024-08-23
MATRIX2024-08-23
MATRIX2024-08-23
MATRIX2024-08-23
MATRIX2024-08-23
SPSETIA2024-08-23
SPSETIA2024-08-23
SPSETIA2024-08-23
SPSETIA2024-08-23
SPSETIA2024-08-23
SUNWAY2024-08-23
SUNWAY2024-08-23
SUNWAY2024-08-23
UEMS2024-08-23
UEMS2024-08-23
UEMS2024-08-23
UEMS2024-08-23
UEMS2024-08-23
UEMS2024-08-22
MAHSING2024-08-22
MATRIX2024-08-22
MATRIX2024-08-22
MATRIX2024-08-22
SPSETIA2024-08-22
SPSETIA2024-08-22
SUNWAY2024-08-22
SUNWAY2024-08-22
SUNWAY2024-08-21
IOIPG2024-08-21
MAHSING2024-08-21
SPSETIA2024-08-21
SPSETIA2024-08-21
SPSETIA2024-08-21
SPSETIA2024-08-21
SUNWAY2024-08-21
SUNWAY2024-08-21
SUNWAY2024-08-21
TROP2024-08-21
TROP2024-08-20
IOIPG2024-08-20
IOIPG2024-08-20
MAHSING2024-08-20
SPSETIA2024-08-20
SPSETIA2024-08-20
SPSETIA2024-08-20
SPSETIA2024-08-20
SPSETIA2024-08-20
SPSETIA2024-08-20
SUNWAY2024-08-20
SUNWAY2024-08-20
SUNWAY