Maintain NEUTRAL on Property Developers with a slight negative bias. Property demand remains soft, no thanks to buyers’ wait-and-see attitude and tighter lending liquidity; the latter has yet to show any signs of sustainable improvement. Valuations appear to have bottomed as FD RNAV discounts have remained relatively stable at 50% (1QCY15: 52%) vs. historical highs of 57%. Average developers’property sales is expected to decline by 8%-1% over the next two years while average earnings growth uninspiring at 7%-7% over the same period. We have factored in most of the known earnings risks and downgraded our recommendations last quarter, thus, there are only minimal changes this time around. However, we cannot confidently call this the ‘bottom’ as there could be potential valuation de-ratings due to the structural changes arising from GST. We rather wait for a couple of months to assess how the market will react to GST before we can confidently say that the sector is ‘ripe for the picking’. Investors wanting to bottom-fish for deep value stocks i.e. KSL (OP; TP: RM2.48), MATRIX (OP; TP: RM3.05), HUAYANG (OP; TP: RM2.20) and ECOWLD (NOT RATED) will need to take a 9-12 months view as the sector will be volatile and also lacks fresh catalysts. Short-term investors should stay on the side-lines. We expect more landbanking in 2H15 as we gather landowners are becoming more realistic with prices. Consequently, expect more cash calls for developers with a higher-thanaverage (0.3x) net gearing level. M&A plays, like SUNWAY’s (OP; TP RM3.74) listing of SUNCON, offers some excitement. Privatisations attempts could also occur if property valuations remain low. Recently, HUNZA (NOT RATED) has capitalized on the current market conditions to privatise the company. Our TOP PICK remains SPSETIA (OP; TP: RM3.95) premised on bullet recognitions from overseas projects and sweeteners arising from potential M&A activities/long-term management team.

Things are already tough on the ground prior to GST. On the ground, we are seeing developers embarking on heavy promotional efforts to achieve take-up rates and clear unsold units/inventories. Furthermore, new project launches have been relatively slow and even with the new project launches, we noticed that developers have only released ‘bite size’portions. This is even before the implementation of GST on 1-Apr. This is widely anticipated, as we had previously highlighted that a pre-GST demand rally is unlikely given buyers’ wait-and-see attitude and tighter lending liquidity.

Lending remains tight. Jan-15 residential loans applied surged by 9% Ytd- YoY after 12 consecutive months of YTD declines. Data is too limited at this juncture to determine if this had anything to do with the ‘pre-GST’ demand rally, although we are inclined to lean towards ‘unlikely’. Nonetheless, corresponding residential loans approved for Jan-15 remained relatively lukewarm at +3% Ytd-YoY, indicating that lending liquidity to the sector remains very challenging. Although Bank Negara Malaysia (BNM) is satisfied with the effects arising from the series of tightening policies, we believe the situation is likely to abate in the near-term given weak systems loans growth and high Loan-Deposit Ratios (LDR) of 81.8% at Jan-15.

Uninspiring sales trends will lead to weaker future earnings. Most developers are guiding flattish to declining sales trends and in our universe, we expect FY15/16E – FY16/17E sales to drop by an average of 8%-1% whiles average earnings growth is likely at 7%-7%, respectively. Besides affordability issues and tighter lending liquidity to the sector, we observe that buyers are adopting a longer-than-expected ‘wait-and-see’ stance due to macroeconomic uncertainties whilst many are not sure how GST will affect the property market.

So the question is, has the sector full priced in the negatives?

Source: Kenanga Research - 6 Apr 2015