Property M-Reit - OVERWEIGHT - 26 June 2012

We are upgrading PROPERTY DEVELOPMET sub-sector to an OVERWEIGHT (from NEUTRAL previously). This is because of property developers’ bottomed-out valuations, their abilities to continue raking in high sales on the back of continued market demand for primary properties, the less likelihood now of further Bank Negara tightening measures and a recovery in residential loans approvals.  Key risks to our sector call lie with Budget 2013 (e.g. higher RPGT) and GE timing, which will likely be in 3Q12. We are positioning for 4Q12 broad market recovery as high beta stocks (like most developers under our coverage) with strong headline numbers and earnings growth will move in tandem, assuming that the highlighted risks above has abated by then.  However, we must qualify that we do not expect bull-run valuations at this juncture given our longer term concerns on the physical property market. As a result, we have narrowed our FD SoP RNAV discount basis, with the following results.

- Upgrading in our Calls and Target Prices:  IJMLAND (OP; TP: RM2.64), MAHSING (OP; TP: RM2.23) and Hunza Properties (MP; TP: RM1.50);

- Upgrading in the Target Prices but Call maintained: SPSETIA (MP; TP: RM4.05); and 

- Maintaining both the Calls and Target Prices:  UEMLAND (OP; TP: RM2.65), UOA Development (OP; TP: RM1.65), Crest Builder Holdings (OP; TP: RM1.49). 

Reiterate OVERWEIGHT on M-REITs and Property Investment. Although MREITs may look expensive as they continue to be rerated upwards, we believe the trend will continue as it is supported by the investors’ need for defensive stocks, particularly given 3Q12 likely market volatility, global economic uncertainties and new entries of retail M-REITs. We prefer retail M-REITs over office/industrial ones because valuations will be held up given the IGB REIT upcoming listing and potentially KLCC Property Holdings REIT-ing their asset(s), which will lend strength to larger cap M-REIT valuations. 

All in all, we are maintaining our calls but are revising up our TPs for SunREIT (OP; TP: RM1.42), CMMT (OP; TP: RM1.69) and AXREIT (MP;  TP: RM2.90). We also think the rerating of KLCC Property (OP; TP: RM4.60)  is underway as we take the view that the issue of its RCULS conversion will be resolved concurrently with the REIT-ing of its retail or all of its assets.   

Source: Kenanga