Maintain NEUTRAL on developers with a slight positive bias. Budget-2015 is expected to be NEUTRAL with some slight positives like DIBS for properties below RM400k/unit. Property stocks could potentially rally on the premise of a pre-GST demand rally, which hinges on banking liquidity which appears to be challenging currently. After a stunning performance by small-mid cap developers, we think large cap laggards are due for a relief rebound, especially if Budget-2015 is NEUTRAL as expected. We advice investors to be (i) selective in terms of picking affordable plays (e.g. MATRIX, HUAYANG) or under-researched property counters with deep values (ii) selective big-caps laggards with emphasis in Klang Valley (e.g. MAHSING, IOIPG). Our TOP PICK for the sector is KSL (TB; TP: RM6.63).

Maintain NEUTRAL on developers with a slight positive bias. Current property cooling measures have been effective in curbing demand as transaction volumes remain soft while 2QCY14 House Price Index (HPI) indicates that price growth has levelled-off at 6.6% or at more sustainable levels. Hence, we expect Budget-2015 to

be largely NEUTRAL (e.g. more PR1MA emphasis) although we could potentially see some slight positives like DIBS for properties below RM400k/unit; but this incentive only significantly benefits selective developers (e.g. MATRIX, HUAYANG, CRESNDO). However, as the market had widely anticipates this, property share price excitement may be slightly muted post Budget.

Small-mid cap stocks dominated in 3QCY14 as investors chase for underresearched stocks while affordable plays remains a popular theme. Most large cap developers were sluggish save for IJMLAND and SUNWAY which saw M&A activities. Meanwhile, the sector is trading at historical average valuation level (e.g. RNAV discounts) which is suitable as sector dynamics are not in a ‘bull-run’ mode. Industry news flow will be largely infrastructure related, although we reckon more concrete news will be felt in early 2015 rather than 4QCY14. Landbanking is also expected to remain relatively quiet.

Too early to ‘celebrate’? Property stocks could potentially rally on the premise of a pre-GST demand rally, which hinges on banking liquidity. At this juncture, property lending has been challenging, as seen with lacklustre loan indicators. Our banking analysts expect the current lending momentum to remain till year-end and that banks may narrow lending spreads in the future due to unsustainable NIM compressions. This could dampen hopes of a pre-GST demand rally. Meanwhile, our economists anticipate another 25 bps hike in OPR by Nov-14. All these factors could lead to developers missing current year’s sales targets or growth in next year’s targets. Hence, we take the view that rallies in 4QCY14 may be short lived or selective.

After a stunning performance by small-mid cap developers, we reckon that large cap laggards are due for a relief rebound since (i) many are trading below average valuation levels (ii) Budget-2015 is expected to be NEUTRAL as investors’ fears would have been abated. We advice investors to be (i) selective in terms of picking affordable plays (e.g. MATRIX, HUAYANG) or under-researched property counters with deep values (ii) selective big-caps laggards with emphasis in Klang Valley (e.g. MAHSING, IOIPG). Our TOP PICK for the sector is KSL (TRADING BUY; TP: RM6.63) as the stock is due for a re-rating given its: (i) undemanding valuations (ii) potential resumption of dividends or dividend policy (iii) potential bonus issue.

Source: Kenanga