The KLPRP index underperformed the FBMKLCI for the third consecutive year, which is the first time since 2003 (typically displayed only two consecutive years of underperformance). After a run-up in 1H17, there was a major unwinding of property share prices over 2H17 with small-mid caps seeing the highest volatility in earnings and share prices. Fundamentally unexciting - our universe’s total sales/earnings are expected to grow by +4%/-1% YoY in FY17E/18E and +3%/0% YoY in FY18E/19E and universe unbilled sales remain steady at one year. Land banking news will remain patchy as developers are cautious with balance sheet capacity – currently, our universe average net gearing is healthy at 0.3x. Valuations are below historical mean, but rebound plays may be capped by potential hikes in OPR (expecting 2 hikes of 25bps each over 2018), as per our analysis – MRTV tends to track the spread between Average Lending Rates vs. OPR instead of lending rates itself (refer to charts below). Hence, we expect the sector’s valuations to oscillate around mean levels. We have widened RNAV/SOP discounts by 0.25-0.50SD from previous levels to reflect the negative sentiment from OPR hike. Although valuations are looking more compelling, especially for our OUTPERFORM calls, investors wanting to take position need to be cognisant of Feb-2018 reporting season, where headline targets will be revealed, or take a long-term (>12 months) view as share price performances will be largely range-bound. Big-boys’ yield plays may be a good place for shelter if one really needs exposure to the sector - both UOADEV (6.1% yield) and MAHSING (4.5% yield) have above-average dividend yields and are expected to have stable headline sales outlook. Key excitement for the sector will likely be M&A driven given low valuations while the sector is expected to consolidate further given structural changes. Maintain NEUTRAL on Developers.

Third consecutive year of underperformance. The KLPRP index (+5.8% YTD) had underperformed the FBMKLCI (+7.2%) YTD. This the first time since 2003 that the KLPRP index had underperformed the FBMKLCI for 3 years in a row as typically, the KLPRP underperformance is only for 2 consecutive years. The sector saw major unwinding on property share prices in 2H17 albeit the QoQ improvement in our universe’s earnings expectations during 3QCY17 reporting season; most developers are keeping to their original sales targets and expected to be on track during the 4QCY17 reporting season. Noteworthy is that over 2H17, small-mid cap players 

Source: Kenanga Research - 4 Jan 2018