Friday, October 5, 2012

Property - A Game Between Risk And Return (Neutral)

Some recovery but fundamentals still not supportive for a re-rating. While a few positive indicators could have prompted us to upgrade the sector, we still think the fundamentals are not strong enough to warrant a re-rating. Valuations too are not sufficiently cheap to shout for a bargain buy. Given RHBRI’s GDP growth forecasts of 5% and 5.4% for 2012-13, commercial and residential property sales growth is estimated at 13.1% (from est. 10.5% in 2012) and 10.3% (from est. 9.0%) for 2013. These projections are much lower compared to the corresponding growth of 15.9% and 22.1% in 2011.

What are the positive drivers? The property market has actually started to adapt to the credit tightening measures since 3Q. The recovery was driven by liquidity flow as well as low interest rates in the region. As at Aug12, YTD residential property, nonresidential property and real estate loans grew 13.6%, 22.4% and 35%, signaling the significance of liquidity. Meanwhile, Malaysia HPI is expected to rebound slightly from 3Q onwards. The index only grew by 0.2% qoq in the 2Q, the slowest since 4Q08.

The negative headwinds. The policy to cool the property market continues to take a toll. For YTD loan approvals, residential and non-residential property loans still see a contraction of 5.1% and 0.6%. Other challenges ahead include the potential impact on the physical market when the recent RPGT hike takes effect from Jan 2013, the timing of the 13th general election, and the noise from the unsettled European debt crisis. We are mindful that the power of liquidity may neutralise the overall negative impact. Given the scenario, developers will therefore be very selective in their product launches. Opportunities lie in the mid/mid-to-high-end housing segment pricing at < RM600k/unit, given the recent increase in income limit under the My First Home Scheme. Other residential and commercial products within matured townships will also do well.

Risks. Downside to GDP growth dampening demand for property.

Maintain Neutral. The sector will only be re-rated if there is a surprise interest rate cut, upside in GDP growth, higher-than-expected liquidity flow or the revelation of MRT Line 2/circle line/high-speed rail link. Currently, the property stocks under our coverage are trading at 40% discount (from 37% in June) to RNAV on average, and below their longterm average PE. We therefore believe there is some room for share price to rebound towards our fair value, especially the underperformed stocks. Fundamentally strong value developers are perferred. Our top picks are IJM Land, UOA Dev and Sunway.

Source: RHB Research - 5 Oct 2012

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