Maintain overweight: While Bank Negara Malaysia (BNM) maintained the overnight policy rate (OPR) at 2% on Jan 26, it hinted that interest rate may soon be raised to prevent the build up of financial imbalances that could arise from interest rates being too low for a prolonged period of time.
Certain quarters may be concerned that eventual rate hike may curb property buying interest. We beg to differ. Our argument is based on: (1) any eventual rate hike will be gradual and minimal as global economy is still fragile and accommodative monetary stance is still required to spur growth, (2) current mortgage is very low and has sufficient buffer to cushion any hike following 150bps drop in OPR since the recession and 200bps drop in interest spread since two-three years ago, (3) property sales have increased during period of rising interest rate as seen in past property cycles, and (4) the current buoyant sentiment that will continue to spur property buying.
On Jan 8, the Malaysian Accounting Standards Board (MASB) published IFRIC 15 which is applicable for accounting period commencing July 1. Under the new rules, property developers are required to recognise revenue using the completion method instead of the existing percentage of completion method.
Going forward, the earnings of Malaysian property developers, which adopt the sell-then-build concept, will be volatile and this is especially so for developers of high-rise development.
The impact on large-scale township developers will be more moderate as these developers generally have multiple property launches and completions every year. As such, the price/earnings (P/E) valuation method will no longer be meaningful in six-12 months time when developers migrate to the new accounting rules.
Price/book value (P/BV) or revised net asset value (RNAV) are generally more stable and going forward, valuation of developers will predominantly be asset based. Having said that, the vast majority of Malaysian listed developers trade at a significant discount to BV as well as RNAV.
Valuing a developer solely based on its BV or RNAV without taking into account whether the developer realises the value in its assets via sales and/or development activities is also not prudent. Given earnings volatility and lack of alternative information on sale/development activities, we believe investors will realign their portfolio to those with good corporate governance, good reporting standards, history of consistent earnings delivery and good investor relations.
Confidence among developers continued to be high going into 2010 judging by the many press statements on property launches in the months ahead. Some of the notable news flow on new launches in January include Sunrise’s Solaris Tower in Kuala Lumpur and Richmond project in Canada, E&O’s Quayside Seafront Resort condominiums (RM1.8 billion) in Seri Tanjung Pinang, RM6.4 billion launches by unlisted Naza Group which may also include a proposed 100-storey office tower near the Matrade Centre in Kuala Lumpur, There are also Scientex’s high-end property project in Pulai, Johor (RM1 billion), and the revival of the abandoned The Grand Duta Hyatt hotel at the junction of Jalan Sultan Ismail and Jalan Ampang in Kuala Lumpur into a mixed development project.
Sales momentum has also remained strong going into 2010. The much-awaited launch of Sunrise’s MK 28 condominium in mid-December 2009 has achieved bookings exceeding our expectation. To date, the company has secured about 50% bookings valued at about RM500 million. Furthermore, the average selling price of RM785 psf was also higher than our expectation. Over the next few months, we expect Sunrise’s unbilled sales to surpass the RM1 billion mark again.
Property bellwether S P Setia has also seen sustained property demand. Over the weekend, the soft launch of its Cyrtandra semi-detached houses was fully taken up within three hours on Saturday.
Meanwhile, Mah Sing aimed for a 39% climb in property sales to RM1 billion this year. Recent previews of its two new projects, Garden Residence in Cyberjaya and Perdana Residence 2 in Selayang, have seen over 2,600 and 1,500 registrants respectively. Both projects are slated for launch in early 2Q10.
We remained bullish on the residential sub-segment of property sector on expectation of higher sales in CY2010 amid low interest rate and improving sentiments. As such, we prefer developers which cater to this segment, citing Sunway City and S P Setia as our top picks.
Although S P Setia has hit our target price, there is scope for target price upgrade as we have not factored in Setia City into our earnings and RNAV estimates. Among non-rated property stocks, we also like IJM Land and Mah Sing.
On the other hand, Sunrise offers significant upside of 51%. It continued to trade at significant P/E discount to its peers as investors remain concerned of its earnings visibility given its exposure to the more speculative high-end high-rise properties. However, strong sales from its MK 28 project will provide the re-rating catalyst in the months ahead.
On the valuation method, we will be revising our target prices on all property stocks under coverage using RNAV.
This article appeared in The Edge Financial Daily, Feb 3, 2010.
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