Weekly property review: March 15 to 21

A subdued week

• Ended lower for the week

The KL Property Index shed 0.6% last week. Main loser was bellwether SP Setia, which ended 5.9% lower amid an uninspiring 1QFY10 results and termination of joint venture for the development of Setia View. Among stocks under coverage, YNH and Sunrise also ended lower by 2.6% and 1.9% respectively. On major shareholding changes, Employees Provident Fund (EPF) sold 0.2 million shares in SP Setia but added 0.7 million shares in Sunrise. Besides that, Dato' Dr Yu Kuan Chon bought 0.8 million shares in YNH.

• Notable property news

Key highlight for the week was the termination of joint venture by SP Setia for the development of Setia View project on a 45-acre land adjacent to Setia Pearl Island in Penang. Arising from the JV termination, SP Setia has also filed a claim to recover RM12.2m recover of advances and development project expenditure incurred from its JV partner, PPH Resorts (Penang) Sdn Bhd. However, the latter also filed a counter-claim of RM5.72 million from SP Setia. This setback was followed by an uninspiring 1QFY10 results which fell short of house and consensus estimates on an annualised basis due to seasonally lower construction progress and continued margin compression.

Other notable news for the week include Malton’s proposal to develop an RM2.5 billion commercial and residential project in Kuala Lumpur on a parcel of land owned by Ho Hup in Bukit Jalil. Johor-based developer, KSL Holdings, also made the news following the emergence of Templeton Emerging Markets Group of Franklin Templeton Investments as a major shareholder with a 5% stake.

• Maintain OVERWEIGHT

We remain bullish on the property sector, in particular the residential subsegment, as we believe investors’ concern on the impact of interest rate hike has been overblown. We hold the view that interest rate hike will be gradual and minimal. Further to that, property sales is driven more by sentiment, which remains buoyant, rather than interest rate alone. We like the residential sub-segment on expectation of higher sales in CY2010 amid still low interest rate and improving sentiments.

We have downgraded SP Setia from buy to hold last week as the bellwether stock is fairly valued at current price. We recommend investors to buy laggard mid-cap property stocks such as Sunway City and Sunrise. The former may have re-rating catalyst from its REIT listing while the latter offers significant upside of 58% and recent strong sales from its MK 28 project will continue to underpin earnings visibility. Among non-rated property stocks, we also like IJM Land and Mah Sing.