It is time for Iskandar Developers to shine for the following reasons; 1) Developers valuations have been extremely depressed and ranged-bound for most of CY12 albeit their record sales and earnings performances; 2) Future economic growth from SMEs relocating to Iskandar from Singapore; 3) Changes in demand profiles for lifestyle (e.g. gated and guarded) rather than bread-and-butter products – Iskandar is at least 5-7 years behind the curve of Klang Valley; 4) The migration factor where we expect lower income earners in Singapore, which have more mileages with their SGD income in Iskandar, to set up homes and work in Iskandar (e.g. SMEs) particularly when the Johor-Singapore MRT is up and running; 5) Increasing student population, which will eventually result in organic population growth, as seen in areas like Subang Jaya.

Developers will be the best news flow proxy to Iskandar, including news of the Johor-Singapore MRT, JVs with or land acquisitions by foreign developers, potential Senai-Changi airport, more G2G agreements, including a seamless immigration center and increasing FDIs (e.g. O&G plays in Pengerang and Tanjung Piai). This aligns well with our House views that investors will switch to high-beta stocks like developers. Additionally, Iskandar Waterfront Holdings (IWH) listing will likely boost other Iskandar-based developer’s valuations. So, put your bets on Iskandar driven developers as those with sizeable exposures in Johor with immediately developable projects (e.g. SPSETIA, UEMLAND, MAHSING, IJMLAND) are targeting sales growth of 12%-31%.

Upgrading developers to OVERWEIGHT from NEUTRAL post GE. Our sector upgrade will be driven by raising UEMLAND to OUTPERFORM (TP: RM3.25), which will be our Top Pick post GE, as it will be the next best news-flow proxy to Iskandar. We like developers with big exposures or sizeable catalytic projects in Iskandar as it will be a strong sales growth driver. Having said that, while we are confident that the Singapore-Iskandar play is too big to fail, we are cognizant of the possibility of prolonged uncertainties post GE and recommend that investors still have some exposures to resilient high dividend yielding stocks of 6% or more to safe-guard against any negative surprises.

We have OUTPERFORM on IJMLAND with a higher TP of RM2.70, UOA Development with unchanged TP of RM2.30, Hua Yang with unchanged TP of RM2.10. We have also recently initiated Dijaya (OP; TP: RM2.05). Maintain MARKET PERFORM but with higher TPs for SPSETIA (TP: RM3.55) and MAHSING (TP: RM2.40), while we keep our call on Hunza (UP; TP: RM1.50) unchanged. Buy-on-weakness during GE process as we expect high-beta developers to de-rate by 0.5-1.0SD from their current Fwd PBV levels for less than a week before rebounding to pre-GE levels (refer overleaf for floor prices).

Source: Kenanga