Property Developers - Budget 2013 within, but short term rebounds expected

Maintain NEUTRAL on developers. Budget 2013 property measures were RPGT hikes to 15%-10%, extension of the 50% stamp duty reduction for homes <RM400k/unit and affordable housing incentives. While these were within our expectations, immediate term share price rebounds are expected for developers which had been prematurely sold down prior to the Budget. Developers’ Fwd PBV valuations are also trading close to trough levels. However, we are NOT OVERWEIGHTING the sector as we do not see any strong immediate term catalysts in 4Q12 beyond  our expected immediate short term rebound, as GE risks may add more uncertainties. Also, the gradual yet continuous tightening of real-estate policies to address general affordability issues may cap longer term demand sentiments; investors may find it tougher to exit the market, given the increasing disparity between primary and secondary markets. We may review our sector call next year depending on the GE timing and catalytic news (e.g. RRI land awards, TRX project awards). Potential risks (upward bias) to our calls are earlier than expect awards (by 4Q12) of government projects like TRX to developers under our coverage since the TRX realignment of existing utilities will be completed in Oct-12. Our 4Q12 Top Pick remains as UOA Development (OP; TP: RM2.30) as a ‘defensive developer’. 

Key Budget 2013 measures  are; (1) RPGT hike to 15% (10% previously) for the first 2 years from purchase date and to 10% (5% previous) for the 3rd-5th year; after 5 years, there is no RPGT; (2) Extension of 50% stamp duty exemption for MOT/SPA for purchase of first residential property of up to RM400,000 (previously RM350,000); (3) affordable housing schemes (refer overleaf); (4) Tax exemption for property developers of the Tun Razak Exchange (TRX) project.

Within our expectations. A RPGT hike and more affordable housing incentives were announced in the Budget in line with our expectations highlighted in our pre-Budget 2013 report (13/9/12). On the RPGT hike, we previously highlighted that if this were to be the case, we would not be expecting a significant impact on the physical market, particularly for developers, as the first two years are typically the construction period for new properties. It may slightly deter some of the secondary market transactions, particularly for investors with short horizons; this measure does match up with the government’s aim to reduce speculative activities, but as it is, new launches are more attractive given the better financing/marketing schemes (e.g. DIBS, rebates), low interest rates and property valuations at developers’ price. Other measures that were not anticipated are ‘largely Neutral’, like the extension of the 50% stamp duty exemption for MOT/SPA for purchase of first residential property of up to RM400,000 (refer overleaf). 

Knee-jerk reactions were premature, so get ready for a short term rebound. We understand that the market expected worse measures, with rumours of stamp duty hikes and RPGT hikes of up to 30% for the first 5 year holding period (we definitely thought these were unlikely because it will hurt future government projects like RRI and TRX), resulting in a preBudget knee-jerk with some of developers’ share prices dipping by 14% from a month ago. We do expect an immediate term rebound to normalize levels (prices at one month ago or before media speculations of Budget 2013) over the next few weeks.  Short-term rebound recommended plays are UOA Development (OP; TP: RM2.30), IJMLAND (OP; TP: RM2.60), UEMLAND (MP; TP: RM1.85), Mah Sing Group (MP; TP: RM2.40). Once these stocks revert to more “normalized levels”, we expect our Market Perform calls to remain range-bound due to lack of catalytic news flow and GE risks.  

Nevertheless, maintain NEUTRAL on developers as we recommend that investors be selective or adopt a trading stance. Although most of the developers under coverage are trading close to trough levels, we do not see any near term catalysts beyond the immediate term rebounds as nearing GE risks will keep the sector’s valuations capped. Most of the developers under our coverage Fwd PBV valuations remained lower than last year’s average due to the onset of mortgage assessments using net rather than gross pay (refer overleaf). 

4Q12 Top Pick remains as UOA Development (OP; TP: RM2.30) for a more sustainable upside, due to its strong dividend yields of 7.9% and their ability to meet their dividend obligations. Crest Builder (OP; TP: RM1.34 as we expect more catalytic news flow), SP Setia (MP; TP: RM3.80) and Hunza Properties (UP; TP: RM1.50) are maintained.

Source: Kenanga