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Property
? Upgrade valuations. We upgrade our valuations for the property stocks under our coverage, as many have almost hit our target price recently. We still see values in the sector led by sustained property prices and demand, and valuations of many property stocks are still attractive, currently trading at or slightly below their +1 stdev of 6-year P/B mean. Our expectation that ARPP will continue to hold well until 2012/2013 suggests that the property sector will remain robust next year.
? Budget 2011 in favour to mid-end housing. No bad news on the sector in Budget 2011. We believe the Government or BNM will announce new measures seperately to clamp down speculative buying activities. We reiterate our view that, even a 70-80% cap on loan-to-value ratio is to be implemented, property sales momentum will continue as long as incentives offered by developers are continued.
? Liquidity to boost physical property and equity market. We believe the influx of liquidity led by low interest rate will continue to drive both the physical property sales and property stocks. Although BNM is expected to raise OPR next year, the timing of rate hike will depend on the growth stage of the global economy. The potential delay in rate hike will be a good news to the property sector, as the resulting cheap financing will continue to support property buying momentum.
? Margin expansion to kick in next year. With liquidity-led asset reflation coming into play, we expect margin expansion to kick in as property prices continue to head north. This will especially be evident for big developers, such as SP Setia and IJMLD, with big parcels of landbank in hand. We note that, land cost for SP Setia’s Setia Alam is only at RM3.50 psf, whereas, for IJMLD’s Canal City land, the effective cost is about RM4.50-6.00 psf. After the initial hefty infrastructure cost, margins for subsequent launches will be higher as any price increase will flow to the bottom-line directly, given steady building material prices. Already, SP Setia has indicated that it has managed to restore margins to normalised levels due to significant price increases after the expiration of its 5/95 campaign.
? Risks. Key risks are:
1) regulatory risks; and
2) country risks.
? Overweight. We expect the liquidity play and margin expansion will first flow to the big caps. Our favourite fours are: SPSB (OP, FV = RM5.94); IJMLD (OP, FV = RM3.50); Suncity (OP, FV = RM5.80) and Mah Sing (OP, FV = RM2.33
Going From Strength To Strength
? Property Index has outperformed. After a lacklustre performance in 1H2010, the KLPRP (Kuala Lumpur Property Index) has increased by an impressive 16.7% vs KLCI’s 13.2% (from 3Q10). Apart from the banks, construction and consumer sectors, property sector is also one of the outperformers in the market. Although the share price of many property stocks under our coverage has approached our target prices, we further upgrade our valuations as we still see values in the property sector. We think it is too early to take profit as current valuations of many property stocks are still compelling, trading at or slightly below +1 stdev above their average P/B. In addition, in our sector report dated 4th Oct 2010, we expect ARPP (Average Residential Property Price) to continue to hold well until 2012/2013. This suggests that the property market will remain robust going into 2011.
? Budget 2011 in favour of affordable housing developers. The much-speculated tightening measures to clamp down speculative property buying activities were not mentioned in Budget 2011. However, the Budget 2011 is in favour of mid-end affordable housing developers, as now the Government provides guarantee on 10% downpayment for houses below RM220k for first-time home buyers who earn less than RM3k per month, as well as the 50% exemption on stamp duty for first time home buyers for a house priced below RM350k. That said, we believe the Government is still keeping its agenda to target the “overheating” property market, to be in line with the tightening measures implemented in the regional markets. We believe LTV ratio will eventually be capped.
However, we reiterate our view that, even if a 70% or 80% cap on LTV ratio is implemented, property sales momentum is likely to continue as we believe developers will continue to offer their aggressive scheme and rebates to lure buyers. Upfront “entry cost” will still be affordable. However, the situation would be different if
(i) The Government is to stop developers from having innovative scheme in addition to a 70% or 80% cap on LTV ratio; or
(ii) The commercial banks are instructed to adjust the house price for the rebates offered by developers as the “real” house price for the application of mortgage loan. In any case, buying momentum will be adversely affected, as the discontinuation of incentives will significantly raise the effective “entry cost” for a property and buyers/investors can no longer enjoy the benefit of high leverage.
? Six key drivers for the sector. We continue to think that the Government will unlikely penalise the property sector with over-stringent measures, as the resulting impact will be rather severe, affecting other property related sectors. We still see several strong growth potentials to underpin the property sector and hence continue to support our convincing Overweight rating on the sector:
(i) Faster growing of young demographics to drive big-ticket purchases i.e. homes and motor vehicles;
(ii) Low mortgage rate as commercial banks continue to offer discount to BLR;
(iii) Aggressive promotions/incentives being offered by developers;
(iv) Stregthening in ringgit that encourages foreigners participation;
(v) Property is a preferred vehicle to hedge against inflation; and
(vi) Sector is still fueld with good news on Government’s development plans.
? Massive liquidity to boost the physical property and equity market. We believe the influx of liquidity will continue to drive both the physical property sales and property stocks. The liquidity is mainly led by the low interest rate in the regional countries. Note that, the US Federal Reserve has again kept its benchmark interest rate unchanged on 22nd Sept 2010, and the Bank of Japan has also cut its overnight call rate target to a range of 0% and 0.1% on 5th Oct 2010. All these may signal that, reserve banks in the region may be reluctant to raise interest rate over the short term to ensure stable economic growth.
We also highlight that, ringgit and excess liquidity have a negative correlation of 0.72. Hence, as ringgit continues to strengthen, liquidity will continue to flow into Malaysia. The recent 2.1% mom strengthening in ringgit has led to a 3.3% mom increase in excess liquidity in Sept 2010. According to RHBRI’s economics team, BNM will likely resume its policy normalisation in 2011 and the OPR will be raised by 50-75 basis points to bring it to a more neutral level of 3.25-3.50%.
The timing, however, will depend on how soon the global economy stabilises. Earlier, we expect BNM to resume its policy normalisation in 1H2011. The potential delay will be a good news to the property sector, as the resulting cheap financing will continue to support property buying momentum, and the liquidity created will also flow to the equity market, thus benefiting the property sector as a tactical play.
? Margin expansion to kick in next year. With liquidity-led asset reflation coming into play, we expect developers’ margin to strengthen going forward as property prices continue to head north. This will especially be evident for big developers, such as SP Setia and IJMLD, with big parcels of landbank acquired at low price.
We note that, land cost for SP Setia’s Setia Alam is only at RM3.50 psf, whereas, for IJMLD’s Canal City land, the effective cost is about RM4.50-6.00 psf. After the initial hefty infrastructure cost, margins for subsequent launches will be higher as any price increase will directly flow to the bottom-line, given the current steady building material prices.
Already, during its 3QFY10 results, SP Setia has indicated that it has managed to restore margins to normalised levels due to significant price increases after the expiration of its 5/95 campaign. To recap, prior to the introduction of 5/95 campaign, SP Setia’s EBIT margin hovered around 20%, and weakened to about 15% when the 5/95 programme was launched in early 2009. We expect the same trajectory of margin expansion for IJMLD for its current projects, as well as its Canal City project once it is started.
? Possible M&A catalysts for the sector. Apart from the key drivers above, we believe the M&A catalyst will be an additional factor to keep investors’ interest in the property sector. Given the continued upcycle of the property sector, the M&A story could well be on the cards, especially for the big boys – SPSB and IJMLD.
Apart from the privatisation potential for IJMLD, the story of the merger of SPSB and other PNB-owned (Permodalan Nasional Bhd) developers could come back again. These developers are Island & Peninsular, Petaling Garden, and Pelangi Bhd. Note that, the merger of these players will create a huge property outfit in Malaysia, considering the amount of landbank held by these PNB-owned developers. In addition, if Sime Darby Property is spun off from Sime, and included in the merger, a “property giant” will be formed.
While this is just our “guesses” and we are not going to examine the pros and cons of the merger in this report, we opine that developers may excite the market by undertaking such an exercise or any M&A with the key objective of growing bigger landbank and to boost market cap. To note, the competitive bidding process for landbank typically drives up land values especially in the current stage of property cycle.
By consolidating with other developers, it could save the time-consuming effort of land hunting. In addition, the inclusion of any big developer into the FBMKLCI top 30 may lead to a significant rerating on the “merged” entity, as there is currently no pure property developer in the list.
Key Risks for the sector
? Risks. Key risks for the property sector are:
1) regulatory risk;
2) discontinuation of incentives offered by developers; and
3) country risks.
Valuations and Recommendations
? Upgrade valuations. Admittedly, regulatory risk still exists, but we are of the view that the Government will unlikely hit the property sector badly, in view of the repercussion on the property related sectors, such as the banks and building materials. As share price of many property stocks are now close to our target price, we seize the opportunity to upgrade our target price further for the property stocks (except REITs and property asset owner) under our coverage. We believe the supportive macro-environment factors warrant the property sector to be traded at higher valuations, and the faster new launches justify for lower discount to RNAV.
In our table below, we also include the indicative valuations based on +2 stdev above the mean of P/B as a support for our RNAV-based valuations. Our adjustment in discount rate ranges from 0 to +20%, depending on the prospects of the developers, location of landbank, turnaround time of landbank and individual exposure to the respective segments – high-rise residential, landed residential, commercial etc. Due to the changes in upside from current price, we downgrade Hunza to Market Perform and upgrade YNH to Trading Buy.
? Big caps top our list. We maintain our Overweight stance on the sector. The recent market correction would be a good entry point for investors. We believe the liquidity play, margin expansion, and the potential M&A theme will first benefit the big cap developers, followed by mid and small caps. We hence include the all-time-favourite property stock – SP Setia into our BUY list. Our picks for the sector are SPSB (Upgrade to OP, FV = RM5.94); IJMLD (OP, FV = RM3.50); Suncity (OP, FV = RM5.80) and Mah Sing (OP, FV = RM2.33).
? Upgrade valuations. We upgrade our valuations for the property stocks under our coverage, as many have almost hit our target price recently. We still see values in the sector led by sustained property prices and demand, and valuations of many property stocks are still attractive, currently trading at or slightly below their +1 stdev of 6-year P/B mean. Our expectation that ARPP will continue to hold well until 2012/2013 suggests that the property sector will remain robust next year.
? Budget 2011 in favour to mid-end housing. No bad news on the sector in Budget 2011. We believe the Government or BNM will announce new measures seperately to clamp down speculative buying activities. We reiterate our view that, even a 70-80% cap on loan-to-value ratio is to be implemented, property sales momentum will continue as long as incentives offered by developers are continued.
? Liquidity to boost physical property and equity market. We believe the influx of liquidity led by low interest rate will continue to drive both the physical property sales and property stocks. Although BNM is expected to raise OPR next year, the timing of rate hike will depend on the growth stage of the global economy. The potential delay in rate hike will be a good news to the property sector, as the resulting cheap financing will continue to support property buying momentum.
? Margin expansion to kick in next year. With liquidity-led asset reflation coming into play, we expect margin expansion to kick in as property prices continue to head north. This will especially be evident for big developers, such as SP Setia and IJMLD, with big parcels of landbank in hand. We note that, land cost for SP Setia’s Setia Alam is only at RM3.50 psf, whereas, for IJMLD’s Canal City land, the effective cost is about RM4.50-6.00 psf. After the initial hefty infrastructure cost, margins for subsequent launches will be higher as any price increase will flow to the bottom-line directly, given steady building material prices. Already, SP Setia has indicated that it has managed to restore margins to normalised levels due to significant price increases after the expiration of its 5/95 campaign.
? Risks. Key risks are:
1) regulatory risks; and
2) country risks.
? Overweight. We expect the liquidity play and margin expansion will first flow to the big caps. Our favourite fours are: SPSB (OP, FV = RM5.94); IJMLD (OP, FV = RM3.50); Suncity (OP, FV = RM5.80) and Mah Sing (OP, FV = RM2.33
Going From Strength To Strength
? Property Index has outperformed. After a lacklustre performance in 1H2010, the KLPRP (Kuala Lumpur Property Index) has increased by an impressive 16.7% vs KLCI’s 13.2% (from 3Q10). Apart from the banks, construction and consumer sectors, property sector is also one of the outperformers in the market. Although the share price of many property stocks under our coverage has approached our target prices, we further upgrade our valuations as we still see values in the property sector. We think it is too early to take profit as current valuations of many property stocks are still compelling, trading at or slightly below +1 stdev above their average P/B. In addition, in our sector report dated 4th Oct 2010, we expect ARPP (Average Residential Property Price) to continue to hold well until 2012/2013. This suggests that the property market will remain robust going into 2011.
? Budget 2011 in favour of affordable housing developers. The much-speculated tightening measures to clamp down speculative property buying activities were not mentioned in Budget 2011. However, the Budget 2011 is in favour of mid-end affordable housing developers, as now the Government provides guarantee on 10% downpayment for houses below RM220k for first-time home buyers who earn less than RM3k per month, as well as the 50% exemption on stamp duty for first time home buyers for a house priced below RM350k. That said, we believe the Government is still keeping its agenda to target the “overheating” property market, to be in line with the tightening measures implemented in the regional markets. We believe LTV ratio will eventually be capped.
However, we reiterate our view that, even if a 70% or 80% cap on LTV ratio is implemented, property sales momentum is likely to continue as we believe developers will continue to offer their aggressive scheme and rebates to lure buyers. Upfront “entry cost” will still be affordable. However, the situation would be different if
(i) The Government is to stop developers from having innovative scheme in addition to a 70% or 80% cap on LTV ratio; or
(ii) The commercial banks are instructed to adjust the house price for the rebates offered by developers as the “real” house price for the application of mortgage loan. In any case, buying momentum will be adversely affected, as the discontinuation of incentives will significantly raise the effective “entry cost” for a property and buyers/investors can no longer enjoy the benefit of high leverage.
? Six key drivers for the sector. We continue to think that the Government will unlikely penalise the property sector with over-stringent measures, as the resulting impact will be rather severe, affecting other property related sectors. We still see several strong growth potentials to underpin the property sector and hence continue to support our convincing Overweight rating on the sector:
(i) Faster growing of young demographics to drive big-ticket purchases i.e. homes and motor vehicles;
(ii) Low mortgage rate as commercial banks continue to offer discount to BLR;
(iii) Aggressive promotions/incentives being offered by developers;
(iv) Stregthening in ringgit that encourages foreigners participation;
(v) Property is a preferred vehicle to hedge against inflation; and
(vi) Sector is still fueld with good news on Government’s development plans.
? Massive liquidity to boost the physical property and equity market. We believe the influx of liquidity will continue to drive both the physical property sales and property stocks. The liquidity is mainly led by the low interest rate in the regional countries. Note that, the US Federal Reserve has again kept its benchmark interest rate unchanged on 22nd Sept 2010, and the Bank of Japan has also cut its overnight call rate target to a range of 0% and 0.1% on 5th Oct 2010. All these may signal that, reserve banks in the region may be reluctant to raise interest rate over the short term to ensure stable economic growth.
We also highlight that, ringgit and excess liquidity have a negative correlation of 0.72. Hence, as ringgit continues to strengthen, liquidity will continue to flow into Malaysia. The recent 2.1% mom strengthening in ringgit has led to a 3.3% mom increase in excess liquidity in Sept 2010. According to RHBRI’s economics team, BNM will likely resume its policy normalisation in 2011 and the OPR will be raised by 50-75 basis points to bring it to a more neutral level of 3.25-3.50%.
The timing, however, will depend on how soon the global economy stabilises. Earlier, we expect BNM to resume its policy normalisation in 1H2011. The potential delay will be a good news to the property sector, as the resulting cheap financing will continue to support property buying momentum, and the liquidity created will also flow to the equity market, thus benefiting the property sector as a tactical play.
? Margin expansion to kick in next year. With liquidity-led asset reflation coming into play, we expect developers’ margin to strengthen going forward as property prices continue to head north. This will especially be evident for big developers, such as SP Setia and IJMLD, with big parcels of landbank acquired at low price.
We note that, land cost for SP Setia’s Setia Alam is only at RM3.50 psf, whereas, for IJMLD’s Canal City land, the effective cost is about RM4.50-6.00 psf. After the initial hefty infrastructure cost, margins for subsequent launches will be higher as any price increase will directly flow to the bottom-line, given the current steady building material prices.
Already, during its 3QFY10 results, SP Setia has indicated that it has managed to restore margins to normalised levels due to significant price increases after the expiration of its 5/95 campaign. To recap, prior to the introduction of 5/95 campaign, SP Setia’s EBIT margin hovered around 20%, and weakened to about 15% when the 5/95 programme was launched in early 2009. We expect the same trajectory of margin expansion for IJMLD for its current projects, as well as its Canal City project once it is started.
? Possible M&A catalysts for the sector. Apart from the key drivers above, we believe the M&A catalyst will be an additional factor to keep investors’ interest in the property sector. Given the continued upcycle of the property sector, the M&A story could well be on the cards, especially for the big boys – SPSB and IJMLD.
Apart from the privatisation potential for IJMLD, the story of the merger of SPSB and other PNB-owned (Permodalan Nasional Bhd) developers could come back again. These developers are Island & Peninsular, Petaling Garden, and Pelangi Bhd. Note that, the merger of these players will create a huge property outfit in Malaysia, considering the amount of landbank held by these PNB-owned developers. In addition, if Sime Darby Property is spun off from Sime, and included in the merger, a “property giant” will be formed.
While this is just our “guesses” and we are not going to examine the pros and cons of the merger in this report, we opine that developers may excite the market by undertaking such an exercise or any M&A with the key objective of growing bigger landbank and to boost market cap. To note, the competitive bidding process for landbank typically drives up land values especially in the current stage of property cycle.
By consolidating with other developers, it could save the time-consuming effort of land hunting. In addition, the inclusion of any big developer into the FBMKLCI top 30 may lead to a significant rerating on the “merged” entity, as there is currently no pure property developer in the list.
Key Risks for the sector
? Risks. Key risks for the property sector are:
1) regulatory risk;
2) discontinuation of incentives offered by developers; and
3) country risks.
Valuations and Recommendations
? Upgrade valuations. Admittedly, regulatory risk still exists, but we are of the view that the Government will unlikely hit the property sector badly, in view of the repercussion on the property related sectors, such as the banks and building materials. As share price of many property stocks are now close to our target price, we seize the opportunity to upgrade our target price further for the property stocks (except REITs and property asset owner) under our coverage. We believe the supportive macro-environment factors warrant the property sector to be traded at higher valuations, and the faster new launches justify for lower discount to RNAV.
In our table below, we also include the indicative valuations based on +2 stdev above the mean of P/B as a support for our RNAV-based valuations. Our adjustment in discount rate ranges from 0 to +20%, depending on the prospects of the developers, location of landbank, turnaround time of landbank and individual exposure to the respective segments – high-rise residential, landed residential, commercial etc. Due to the changes in upside from current price, we downgrade Hunza to Market Perform and upgrade YNH to Trading Buy.
? Big caps top our list. We maintain our Overweight stance on the sector. The recent market correction would be a good entry point for investors. We believe the liquidity play, margin expansion, and the potential M&A theme will first benefit the big cap developers, followed by mid and small caps. We hence include the all-time-favourite property stock – SP Setia into our BUY list. Our picks for the sector are SPSB (Upgrade to OP, FV = RM5.94); IJMLD (OP, FV = RM3.50); Suncity (OP, FV = RM5.80) and Mah Sing (OP, FV = RM2.33).
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