The KLPRP Index (-13% YTD) has severely underperformed the FBMKLCI (-1% YTD). While there was no major negative news for the sector, we noted investors’ general aversion towards the sector. Valuations are near rock-bottom with our universe’s RNAV discount (63.4%) approaching historical peak level (68.5%) while many developers are trading well below their book values. This could be a primer for potential M&As or even privatisation plays, although we have yet to hear any market whispers. While valuations appear compelling, we believe there are issues weighing down the sector, with no clear catalyst in sight. There is deterioration in developers’ ROEs which is more severe than the supporting industries, construction and financials, and ROE trends. Also, more clarity is needed on the new affordable housing policy, including the national affordable housing database, the definition of ‘affordable housing’, easing of lending requirements for first home buyers and the new ruling government’s promise to deliver 1.0m affordable homes over its two terms or 100k units p.a. over the next 10 years versus Malaysia’s average residential transaction of 198.9k units p.a. over CY16-17. While this may bode well for the nation’s aim to increase home ownerships, it could mean more competition for players under our coverage. We expect most developers’ share prices to range-bound at current levels pending the Budget-2019 announcement (2-Nov) or if there are earlier announcements on housing policies or lending requirements. Our Top Pick is UEMS (OP; TP: RM0.970) for deep value and being one of the most bashed-down property stocks amongst the big-boys YTD. Reiterate NEUTRAL.

Underperforms FBMKLCI. YTD, the KLPRP Index (-13%) has severely underperformed the FBMKLCI (-1%). Under our coverage, the top 3 worst YTD share price performers were MRCB, UEMS and AMVERTON while UOADEV is the only one with positive return. This quarter, the KLPRP QTD* return of -4.8% was just slightly better than the FBKLCI (-5.4%) as the sell-down on property stocks mainly took place in the last quarter. We note that the big boys' average performance was better in this quarter, at +2.3% QTD, vs. the small-mid cap players' average (of -14.4%). While there was no major fresh negative news for the sector, investors are generally cautious and prefer to trim positions in the sector or avoid it completely.

Valuations are near rock-bottom! Our universe’s average RNAV discount is now at 63.4% or close to its historical peak level of 68.5%. In terms of Fwd. PBV, we note that the following developers are trading at historical lows and are well below their own book values such as UEMS, IOIPG, SPSETIA, HUAYANG, SUNSURIA (note that most of our covered developers are currently trading below book value, save for ECOWLD and UOADEV which are at 1.0x PBV). For big land-bank owners namely UEMS, IOIPG, and SPSETIA; note that their landbank costs are based on historical acquisition costs with bulk of acquisitions made several years ago, implying low land costs compared to prevailing market value – it also means that the company’s valuations imply no further development profit. This may be a primer for potential M&As or even privatisation plays; but at this juncture, we have yet to hear any whispers on the matter. Most of our universe’s Fwd. PERs are below average to trough levels, though we highlight that Fwd. PER levels may be tough to look at as earnings are retrospective for a developer while some have high earnings volatility, which renders PER valuation less meaningful.

Source: Kenanga Research - 21 Jun 2018