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? SPSB outperformed, but IJMLD could catch up due to cheaper valuations. YTD 2010, the KL Property Index (KLPRP) has increased by 24%. Meanwhile, SP Setia (SPSB) rose 36%, outperformed both the KLPRP and KLCI. The share price performance of IJM Land (IJMLD) has been rather dismal, upped by only 17%. Apart from the all-time favourite SPSB, we think IJMLD is also a good choice to ride on the continued upcycle of the property sector, given its strategic landbank exposure spreading across many regions in Malaysia, and most importantly its
cheaper valuations. Compared to SPSB, IJMLD has relatively shorter history as the merger between IJM Properties and RB Land was only completed in end 2008. As such, there are some limitations when we compare their historical valuations.
? Who’s the best? In terms of size, IJMLD leads due to larger landbank. However, SPSB wins in terms of land efficiency. Although IJMLD has larger landbank compared to SPSB, the latter has larger GDV for its future development. SPSB also has a strong brandname and track record due to its long history, but we think IJMLD is not much lagging behind given its modern design and quality of its projects. In terms of overseas exposure, SPSB appears to be more aggressive given its presence in 3 countries – Vietnam, China and Australia, vs IJMLD’s only overseas exposure in Vietnam. In addition, SPSB is also more responsive to changes in market conditions, considering its pioneered move to kick start the 5/95 home ownership campaign in early 2009 during the economic downturn.
? IJMLD is catching up. Not only we think valuations will catch up, we expect revenue and net profit of IJMLD to get closer to the level that SPSB is currently at by CY2011. Since the completion of the merger between IJM Prop and RB Land, IJMLD’s revenue grew remarkedbly by 64% in FY10 and we expect turnover and net profit to breach the RM1.5bn and RM200m mark in FY12. Earnings growth for SPSB, on the other hand, is relatively less robust.
? Risks. Key risks are: 1) regulatory risk; and 2) country risks.
? Maintain Overweight. No change in our forecasts. We maintain our Overweight stance on the sector. Although SPSB is most familiar to both the local and foreign funds, valuations are rather rich. Upside of 28% for IJMLD is nevertheless more attractive compared to 13% for SPSB. We maintain our Outperform call on both IJMLD and SPSB, with a target price of RM3.50 and RM5.94, respectively.
Picking Among The Bests
? SP Setia outperformed. YTD 2010, the KL Property Index (KLPRP) has increased by 24%. Meanwhile, SPSB (upped 4.4% yesterday), rose 36% YTD, outperformed both the KLPRP and KLCI. The share price performance of IJMLD, on the other hand, was less impressive compared to SPSB and KLPRP, as it was up by only 17%. Apart from the all-time favourite SPSB, we think IJMLD is also a good choice to ride on the continued upcycle of the property sector, given its strategic landbank exposure spreading across many regions in Malaysia, and most importantly its cheaper valuations as a big cap developer. Compared to SPSB, IJMLD has relatively shorter history as the merger between IJM Properties and RB Land was only completed in end 2008. As such, there are some limitations when we compare their historical valuations.
? Who leads in the game? In terms of size, IJMLD has larger landbank of 6,637 acres, spreading over all regions in Malaysia, such as the more common Klang Valley, Penang and Johor states, as well as Seremban, and East Malaysia – Kuching, Kota Kinabalu and Sandakan. SPSB, on the other hand, only has 3,453 acres in its portfolio, largely concentrated in Klang Valley and Johor. However, SPSB wins in terms of land efficiency. Although the estimated remaining GDV is still subject to changes for both companies, purely based on their current remaining GDV/remaining landbank, SPSB yields higher value per acre of land compared to IJMLD. In addition, SPSB has a strong brandname and track record, with a history of more than 30 years. However, in our opinion, IJMLD is not much lagging behind given its scale, modern design and quality of its projects. To recap, IJMLD was formed in 2008 following a rationalisation exercise to merge both RB Land and IJM Properties, which was previously held under parent company - IJM Corp. Although IJMLD’s history is very much shorter compared to SPSB, IJM Corp
has a rather long history of almost 30 years.
As for overseas exposure, SPSB appears to be more aggressive given its ventures into three countries – Vietnam, China and Australia, compared to IJMLD’s only overseas exposure in Vietnam. Although overseas presence is not an emphasis at this juncture, as the property market in Malaysia is still not at “saturated” level and margins for overseas projects are typically low at the initial stage, the overseas ventures nonetheless enhance developer’s profile in the international front, and will be another growth avenue if the initial ventures yield fruitful results. Note that, all of our four picks for the property sector – SPSB, IJMLD, Suncity and Mah Sing (pending) are already in the process of going abroad.
? …but we think IJMLD will catch up. We expect revenue and net profit of IJMLD to be comparable with that of SPSB by CY2011. Since the completion of the merger between IJM Prop and RB Land, earnings growth has been robust, with a net profit growth of 97% in FY10, partially due to the low-base effect as well as the early stage of re-integration. In FY11 and FY12, we estimate a net profit growth of 39% and 53%, respectively, and we expect turnover and net profit to breach the RM1.5bn and RM200m mark in FY12. We believe this is achievable, given its
ongoing project launches as well as its 2,000-acre Canal City project coming up, which will be one of the biggest township projects in the Klang Valley area apart from SPSB’s Setia Alam (remaining landbank 1,026 acres). On the other hand, given SPSB’s high-base effect, earnings growth is relatively less robust going forward. We estimate net profit to grow by 24.1% and 14.6% for FY10 and FY11.
Key Risks for the sector
? Risks. Key risks for the property sector are: 1) regulatory risk; and 2) country risks.
Valuations and Recommendations
? Maintain Overweight. No change in our earnings forecasts and our Overweight rating on the property sector. We continue to believe that liquidity play and asset reflation-led margin expansion will directly benefit the big cap developers. We maintain our Outperform recommendation on both SPSB and IJMLD. Although SPSB is most familiar to all local and foreign institutional funds, the stock is rich in its valuations. IJMLD, however, offers a better upside with its relatively cheaper valuations. Our top picks for the sector remained unchanged: SPSB (OP, FV = RM5.94), IJM Land (OP, FV = RM3.50), Mah Sing (OP, FV = RM2.33) and Suncity (OP, FV = RM5.80), and between SPSB and IJMLD, we prefer IJMLD.
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