CIMB Research Report: United Malayan Land - Upgrading property sector

Results highlights

• Stock an outright BUY. In view of our increasingly bullish stance on the property sector and our upgrade of the sector from Trading Buy to Overweight, we are also upgrading all developers including UM Land to an outright BUY. For UM Land, we make no changes to our earnings forecasts or our RM2.06 target price, which we continue to base on a 50% discount to its RNAV of RM4.11. Potential share price catalysts include 1) improving sentiment and demand for physical properties, and 2) the likely strong rebound in 4Q09 earnings due to land sale gains.

• 2009 a year of rebound. Despite all the problems faced by the sector including squeezed margins, poor sales for most developers, rising unemployment and the economic recession, the property sector was one of the best performing sectors last year. This was because property stocks came from a very low base, having been bashed down in 2008. Share prices also enjoyed a big rebound because the sector is considered to be cyclical and high-beta, and would benefit from the rebound of the stock market and economy. The sector, however, was dealt a temporary blow at end-Oct when the government announced a 5% RPGT that took effect on 1 Jan 2010.

• Prospects brighter in 2010. Property stocks reacted negatively to the RPGT announcement and have been languishing since then. While we were also shocked by the move, we believe that the market has overreacted. Fundamentals are looking up as 1) the economy is forecast to return to growth in 4Q09 after being mired in recession in 1Q-3Q09, 2) the stock market’s spectacular 40%+ rebound in 2009 will help strengthen confidence and sentiment on properties, and 3) affordability of properties is near its all-time best and the low interest rate regime will encourage property purchases, especially with inflation preying on some consumers’ minds.