The property sector is expected to remain challenging for the year due to tighter lending liquidity, potential sector de-rating risks arising from implementation of GST and choppy local equity market arising from low crude oil prices and weakening MYR. The upcoming February reporting season should also see more "misses" than "hits". Property sales for FY15 is expected to be ‘flat at best’ and those developers with very low exposures to mass housing may very well see their sale trends declining YoY. Currently, we prefer big-cap developers over under-researched smallto- mid cap ones as historical performance study indicated that the former tends to outperform the latter in volatile market. We recommend that investors take advantage of the current CNY rally to TOP SLICE the following counters; GOB, GLOMAC, GUOCO, IWCITY, MKLAND and SBCCORP, TITIJYA. Our valuation methodology has been switched to the more conservative PBV-driven method because RNAV plays are not as meaningful when the property market is sluggish. On that note, we are (i) trimming our FVs of the said stocks by 17%-58% which resulted in an across the board TRADING SELL call for all the stocks, and (ii) also CLOSING POSITION on them.

Times will remain tough for the property sector. Following our 1QCY15 Property Sector Strategy report on 30-Dec-14, we highlighted that developers are likely to see more risks (e.g. for headline sales, earnings) while fresh catalysts are lacking. We think the market has yet to fully factor in headline sales and earnings risks and will require at least one to two more quarters of downgrades in earnings estimates. The more glaring issue is the current tighter lending environment which does not appear to be abating at the moment; this would further dampen expectations of a pre-GST demand rally. Post implementation of GST, there is likelihood that the sector may undergo a “structural change” whereby the secondary properties may gain traction over primary ones as replacement costs for the latter may significantly widen the gap between primary and secondary ones due to the inflationary multiplier effect from GST.

Property sales to be “flat at best” to declining. As it is, 2014 average headline sales growth rate is expected to see a decline of 14% (based on the average of developers under our institutional coverage). As for next financial year’s sales guidance, most developers are leaning towards the side of caution. We are expecting a slower 2015 with developers registering flat-to-declining property sales in FY15 due to: (i) buyers adopting a "wait-and-see" stance due to economic uncertainties and inflationary pressures, and (ii) tighter lending liquidity to the sector due to asset quality risks and the banking system’s high loan-to-deposit ratio. Ahead of February-15 result season, we have slashed CY15 headline sales by 5%-34% to yield flattish sales growth for the year, which resulted in a more moderate growth rate of 9% on average for developers under our institutional coverage. Currently, the property stocks in our On Our Radar (OR) universe with Open Positions, indicates an average FY15E earnings growth of 22%, which implies there could be more headline sales and earnings risks in the upcoming February-14 results season.

Big-cap developers preferred over small-caps. Based on our study of the daily YTD share price performances of developers from 2011 to 2014 on a yearly basis, we deduced that: (i) big-cap developers tend to perform better as compared to small-to-mid cap developers in a more volatile broad market, (ii) small-to-mid cap developers tend to outperform big-cap developers under a less volatile broad market situation. In general, under-researched small-to-mid cap developers’ share prices tend to fare worse during times of uncertainties as there is less visibility, more earnings volatility and lack of guidance on the stock; this also appears to be the case for property counters with low institutional holdings. Hence, we believe that the small-to-mid cap developers would have higher downside risks this year as compared to big-cap developers, especially when there is still plenty of ‘meat’ for top-slicing (refer to Property Sector Report, 30-Dec-14).

Take advantage of CNY rally to top slice property stocks. Our 2007-2014 KLPRP Index series analysis indicates that there is a trend leading up to February and following through during the CNY period; the exceptions were (i) 2008 due to GFC, and (ii) 2010 due to the reintroduction of RPGTs after a 3-year holiday. Pre-February/CNY rallies could be also due to the fact that most developers tend to announce their final dividends before year-end results (during the last 2 weeks of Feb), and most developers will pay out dividends either twice or once a year (except for MATRIX). We believe that the mini rally last week could be due to pre-February/CNY effect which is typical every year. Currently, we are seeing a pre-February rally as the KLPRP has been picking up since 8th Jan 2015. Based on our historical trends study, such rally normally sustain up to 16 days at most, from the latter part of January to mid-February before consolidating or correcting. As such, we expect the rally to end by the second week of Feb-2015.

Stick to mass housing or township players and avoid under-researched property counters. As such, we are turning highly selective on the small-to-mid cap players, whereby we prefer those that are well positioned in the mass housing or township segment due to resilient demand like HUAYANG and MATRIX. Even so, under our institutional coverage, we only have an OUTPERFORM call on MATRIX (TP: RM3.05) as valuations are still relatively compelling while HUAYANG (TP: RM2.20) has been recently downgraded to MARKET PERFORM as their share price has recently rallied beyond our TP. Small-mid cap property stocks like GOB, GLOMAC, GUOCO, IWCITY, MKLAND, SBCCORP and TITIJYA are not as well positioned in the mass market segment, i.e. not pure affordable housing or strong township players, while some of them are highly geared (GOB and GUOCO net gearing are above 0.5x).

The property market is sluggish, RNAV plays are less meaningful. Our previous valuations of property stocks in our On Our Radar (OR) universe with Open Positions were based on discounts to RNAVs. However, we note that during bearish property cycles, investors tend to revert back to historical average PBV levels to determine the bottom. On this front, we are switching our valuation methodology to historical PBV basis. We are applying average to “above average” historical PBV on GOB, GLOMAC, GUOCO, IWCITY, MKLAND and SBCCORP. As for TITIJYA, their historical average is not representative as they have been listed for only one year or during the period when property sector’s dynamics were more favourable than currently and thus, we have opted to use historical low PBV levels as a valuation point. As a result, we are (i) trimming our FVs of the said stocks by 17%-58% which resulted in an across the board TRADING SELL call for these stocks, and (ii) also CLOSING POSITION on these counters. 

Source: Kenanga