We are upgrading the PROPERTY Sector to NEUTRAL from
UNDERWEIGHT. The sector will be unexciting because of weaker fundamentals on
the back of a tighter banking liquidity. We also believe that the Malaysian
property sector has hit peak demand after two consecutive years of >20% YoY
growth in sales. But downside risk will be cap by 1) developers’ strong
earnings visibility; 2) changes of sales mix towards the affordable segment
plus Johor products will buck the general flattish trend and allow for decent sales
targets; 3) the market has probably priced in the negatives in the sector; 4)
Bank Negara unlikely to introduce further tightening measures. We reiterate
OUTPERFORM on UEMLAND (TP: RM2.65) and UOAD (TP: RM1.65) while MARKET PERFORM
ratings are maintained on SPSETIA (TP: RM3.90), IJMLAND (TP: RM2.28), MAHSING
(TP: RM2.18).
We retained
UNDERPERFORM ratings on E&O (Top UNDERPERFORM; TP: RM1.49) and HUNZA
(TP: RM1.44). M-REIT and property investment remains as OVERWEIGHT as ‘flight to
safety’ options given our 2Q12 house view of ‘top slicing’, with CMMT (OP; TP:
RM1.55) and KLCC Property (MP; TP: RM3.45). Listing of IGB REIT will keep
valuations high. The market’s anticipation of KLCC potentially REIT-ing some of
its assets will also add excitement to the sector, although we believe it will
not likely be in the near term (refer to our 21/3/12 report, “REIT-ing?”). Our
2Q12 Top OUTPERFORM is Axis REIT (TP: RM2.82) for 1) its strong acquisition
pipeline, which allows for faster NAV growth and hence quicker realisation of
its valuations; 2) limited office
occupancy risks given its quality tenants; 3) there being less choices of good
office/industrial REITs compared to retail ones and 4) its net dividend yield
of 6.0% is higher than CMMT’s 5.5%. 4Q11
results were mainly within expectations,
save for UEMLAND which exceeded our estimate. Developers enjoyed strong
earnings growth of >40% for 2011 given their last two years’ strong sales.
Hunza Properties was the exception with a sharp earnings decline of 30% as it
had held back launches. Generally, the developers were able to meet their 2011
sales targets, implying a 10%-50% YoY growth in sales. Meanwhile, property
investment and M-REITs results under our coverage came in within
expectations.
Weak fundamentals
will keep the sector unexciting. The tighter mortgage assessment criteria was
obvious over the last few months based on developers’ feedback and a sharp MoM
drop in Jan-12 mortgage loans approvals. Whilst residential demand interest is
still strong, loan approval periods have more than doubled. We also understand
that bank valuations of properties, even for new launches, have been toned
down, affecting buyers’ effective margin of financing. Many are not getting the
full 90% margin of finance even for their 1st or 2nd homes, given the current residential margin
of finance of 80%-85% for new launches. Interestingly enough, developers under
our coverage have lowered their 2012 sales growth targets from their previous
quarter’s guidance of 20%-60% to 5%-50% now. Those with more bullish targets
have 1) strong exposure to Johor (a market which we are very bullish on) with
ready launches like UEMLAND and SPSETIA; 2) overseas projects like Australia, which
are still enjoying favorable property dynamics like SPSETIA and 3) very highly
specialised projects like UOAD, which are looking at potential en bloc sales of
their MSC status buildings. Although it is too early to say we have seen the
worse of the tighter banking liquidity given the limited data of just the
Jan-12 month (policy was effective 1-Jan-12), we note that Jan-12 residential
loans approval decline of 24% MOM was the sharpest is the last 12 months. We
believe the situation will continue to persist until Bank Negara relaxes its
responsible lending guidelines, although on the positive side, Bank Negara is
unlikely to impose further tightening measures.
Landbanking news flow is thin, which reinforces our view of a lacklustre
year.
But strong earnings
visibility will limit further downside risks. We do observe more mass housing
and Johor landbanking, as well as launches in the affordable housing segment.
We expect this trend to continue throughout the year as developers lean their
earnings mix towards these products to realise sales targets. For now, their
sales targets look achievable as developers will be rolling out variations of
financing packages, while rebates are
also here to stay. However, high volume mass housing sales also means
less attractive margins. We will be monitoring the mass market closely as tighter
banking liquidity seem to be hurting first home owners. Ironically, nearly 50% of applicants for the
My First Home Scheme (100% financing for homes RM400,000/unit or less for first
home buyers earning <RM3000/month). That said, we think the market has
priced in the bulk of the negative policy news and expect the sector to range
bound at its Fwd PBV mean (KLPRP CY12 PBV of 0.8x @ 6-year average). Also, most
of our developers (except for Hunza) have high unbilled sales providing strong earnings
visibility of 1-1.5 years. Developers with good dividends, like UOA (4.6% net
yield) and MAHSING (4.7% net yield), should limit their share price weakness,
provided they are still able to meet their sales targets.
Source: Kenanga
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