We are downgrading developers to NEUTRAL from OVERWEIGHT on
potential worse-than-expected Budget 2013 risks and the closing GE timeline.
First, high up on our list of fears are hikes in buyers stamp duties, although
we reckon this measure is unlikely.
We think RPGT hikes are likelier, but this will have less
physical impact on developers s the heftiest hike tends to be during the first
2-3 years holding period, i.e. during the construction period. Notwithstanding,
sentiment will still be affected and we anticipate a near-term knee-jerk
reaction on developers’ share prices in this scenario.
Even then, we still expect the physical market to continue
in its current momentum given a liquid banking sector and attractive rates. As
it is, most developers are meeting their sales target, except for UEMLAND,
which is another reason for our sector downgrade as we are cutting UEMLAND
recommendation. Although we are bullish on Johor, there is a high risk of
UEMLAND not meeting headline KPIs as it is now proportionately behind its sales
targets. Our sector downgrade involves us re-basing most of our discount basis
to widen our FD SoP RNAV discount rates to reflect our near-term cautiousness,
although it is worth to note that on the positive side, most developers under
our coverage are already approaching their Fwd PBV trough levels.
We are downgrading our ratings and TPs on UEMLAND (MP; TP:
RM1.85) and Hunza Properties (UP; TP: RM1.50). We are maintaining our ratings
but trimming our TPs on IJMLAND (OP; TP: RM2.60), Crest Builder (OP; TP:
RM1.34), SPSETIA (MP; TP: RM3.80) and MAHSING (MP; TP: RM2.40). Our 4Q12 Top
Pick is UOA Development (OP; TP: RM2.30) because of its strong net dividend
yields of 7.6%-6.9% and its ability to meet its dividend commitments.
Budget 2013 to see fiscal measures? We had initially
anticipated that Budget 2013 will be a non-event for developers as the HPI
index and loans approvals indicated that previous measures are working (RPGT,
70% LTV cap on third homes and mortgage assessment from gross to net pay).
However, the Ministry of Housing has mentioned that “Budget 2013 will see
measures to control the soaring prices of property, including tighter fiscal
policies to curb speculation”. These measures will likely be on addressing the
affordable housing (PRIMA, Malaysia My First Home Scheme) segment. First on our
list of fears are hikes in buyers stamp duties as it will have an immediate
impact on the physical market. RPGT hikes are less of a concern for developers
as the heavier hikes are typically during the first 2-3 years, which falls
under the construction period. If these restrictive measures are implemented,
the government may look to “neutralise” their negative impact on developers
with 1) an auto release mechanism for Bumi units and 2) reviewing the low-cost
housing requirement and framework.
We anticipate near term knee-jerk reactions should these
worse-than-expected Budget 2013 measures be announced. We foresee the
government hiking RPGT to indicate its willingness to reign in property prices,
particularly as GE looms. However, across the board hikes in buyers stamp duty
is unlikely as it will also hurt the first-time home owners' market, unless the
stamp duty hikes are tiered by pricings and first home-ownership status. We do
not expect any banking sector tightening measures. Additionally, the recent
market sell-downs indicate heightened GE fears and higher beta developers will
be affected. However, we expect developers’ earnings to continue to fare well
in the next 12 months because we always believe that the largest driver for new
launches are favorable banking sector dynamics (e.g. low financing rates,
DIBS); hence, developers will continue to chalk up decent sales as we believe
the banking system favours new launches for ‘system loans growth’ dynamics.
Other catalysts and strong news flow will be the land awards from RRI, KLIFD
and RMAF and potentially the KL-Singapore high-speed rail train; however, we
reckon these will be more of a CY13 story.
Risks to our NEUTRAL sector call are that we may even
UNDERWEIGHT developers right after Budget 2013 (28th Sept) in the event of
significant hikes in buyers' stamp duties or unforeseen severe Banking Sector
tightening measures (e.g. ceasing DIBS). We believe all developers under our
coverage will be affected in this scenario and our calls then will mostly be
UNDERPERFORMs with selective MARKET PERFORMs. If this worst-case scenario does
not materialise, we will maintain our currently adjusted NEUTRAL rating on the
sector. (Refer overleaf for full story and valuation details).
Source: Kenanga
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