City&Country: Analysts name their favourites

There is a saying that goes: invest in property investment stocks during a downturn and property development stocks during an upturn. While the general consensus is that the worst is over for the property market, which property stocks are analysts’ picks?

Research head-cum-property analyst of Kenanga Research Yeonzon Yeow has a “neutral” call on property counters, especially those into high-end developments. He prefers township developers.

“In high-end areas like KLCC and Mont’Kiara, there is oversupply and lack of FDI (foreign direct investment). Demand by tenants has also gone down and we expect flat capital appreciation this year. High-end developers then tend to be cautious in their launches.

“However, township developers such as S P Setia, Sime Darby, IOI Properties, Island & Peninsular and Mah Sing Group will see better opportunities. For property stocks, S P Setia is expensive and we like Mah Sing due to its valuation,” he tells City & Country.

Yeow also likes the fact that township developers have the advantage of launching projects according to the market’s needs.

“Township developments are mainly for owner-occupiers rather than investors. They (buyers) can get bank loans to finance their properties and they have job security. However, many developers launched their projects with financial packages recently to fill up their order books and we don’t expect them to have any aggressive launches this year,” Yeow says.

Bernard Ching, associate director of ECM Libra Research, concurs. He says developers targeting the mid to upper-mid residential market such as S P Setia and Sime Darby Property are doing well due to end-financing packages offered as well as pent-up demand from potential buyers who deferred their buying decision last year.

“Sales take-up for high-end high-rise properties is still rather mixed and depends very much on pricing as buyers are looking for bargains due to ample supply in the market. For example, the good response to E&O’s (Eastern & Oriental) St Mary Residences project is probably due to the much lower selling price of about RM1,000 psf compared with the RM1,500 psf initially targeted.

“While there is optimism about the property market due to recovering sales, there is concern recent strong sales take-up may not be sustainable once the cheap end-financing packages are withdrawn. Developers such as S P Setia and Sime Darby have already withdrawn their end-financing packages after achieving their respective sales target for the year,” he tells City & Country.

While some might argue that property developers will see their profit margin squeezed with various financial packages introduced to push sales, Ching is not too concerned about a slightly lower margin as most developers have not dropped prices. In fact, certain developers have actually increased selling prices, he notes.

Analysts generally like stocks with a smaller float, such as Sunway City Bhd (SunCity). ECM Libra’s Ching says the research house is looking at mid-cap property stocks such as Sunway City Bhd (SunCity) and Sunrise Bhd, which remain laggards with undemanding valuation.

“SunCity is currently trading at decent valuations. Its earnings from the property investment division remain stable while there is some upside in its development division. The proposed REIT (real estate investment trust) listing next year will be a potential catalyst. Meanwhile, Sunrise is a valuation call as it is currently trading at a significant discount to its peers.

“We do not favour exposure to pure property investment stocks such as KLCC Property Holdings and IGB Corp as property development stocks will outperform the more defensive property investment stocks during the recovery or upcycle stage,” he adds.

An analyst with a foreign brokerage firm, however, likes IGB Corp. She also finds SunCity interesting for its proposed REIT listing.

On Aug 27, AmResearch maintained its “buy” call on IGB Corp at a revised fair value of RM2.80 per share from RM2, based on a 30% discount (previously 50%) to its net asset value (NAV) estimate of RM4. IGB Corp’s property investment and hotel segment (Gardens Hotel and serviced apartments) showed solid numbers, with an operating profit growth of 6% and 35% y-o-y to RM203 million and RM68 million respectively. IGB Corp closed at RM1.67 last Tuesday, with 1.26 million shares done.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 776, Oct 12-18, 2009