BEARISH OUTLOOK: Analysts at Kenanga Research opined that property counters’ risk-to-reward ratios were starting to favour risks despite their healthy appearance in the residential market.
KUCHING: As the property stock prices in Malaysia have a tendency of being in a ‘sales-driven’ trend in contrast to the ‘bottom-line driven’ course, future share price performances remain uncertain for many property developers.
An analyst from the research arm of Kenanga Investment Bank Bhd (Kenanga Research) opined that property counters’ risk-to-reward ratios were starting to favour risks despite their healthy appearance in the residential market.
Historically, the KL Property Index (KLPRP) index bull runs and underlying upward trends tended to last for 1.5 years. However, the current uptrend has lasted for nearly two years due to the current one year of consolidation, leading analysts to believe much of the ‘good news’ had been priced in.
Hence, the KLPRP could have limited upside at this juncture as the research house was a strong believer of ‘Cycle Theory’.
Large cap developers under the research firm’s coverage like SP Setia Bhd, IJM Land Bhd, Mah Sing Group Bhd were continuously targeting strong sales growth of 15 per cent to 35 per cent in 2011. As such, analysts at Kenanga Research expected the 2011 to 2012 residential property prices to increase by 10 per cent to five per cent.
“We are not overly concerned about bubbles as House Price Index (HPI) data indicates overall residential prices maintained a steady growth trend. However, we are worried about persistent weaknesses in secondary residential market versus primary,” said the research house.
On issues concerning the possible stagnant period of the residential segment, analyst believed that the peak of the baby-boom factor from 1980 might have faded, if not reached, as baby booms were not as strong in the post 1990-era.
“We have also hit a new peak in terms of Malaysia’s total property sales value as a proportion of gross domestic product and historically this ratio tends to reverse itself,” the research firm added.
Many experts also warned for potential saturation and future risks if demand thrives during record low interest rates, non-performing loans, and residential absorption rates. Although household affordability was still looking good, nevertheless, analysts anticipated it to weaken slightly in the calendar year 2012 (CY12) given the rising average lending rates trend.
“We also believe the Economic Transformation Programme like the Mass Rapid Transit have been priced-in, although significant government related land-banking deals may cause some short term price excitement. The government proposed Build-Then-Sell system, which could be implemented by 2015 could propel the sector, although we such news flow will only commence in 2013 or 2014,” noted Kenanga Research.
According to analysts, if the International Financial Reporting Interpretations Committee 15 was implemented under the traditional ‘recognition upon completion’ approach, property stocks were headed for a bumpy ride during the first one to two years of implementation. This was due a tougher valuations of the property counters.
However, besides sharp interest rate hikes and further tightening of banking liquidity, analysts were more cautious of the progressive real property gains tax as this could mean there are fewer ‘loop holes’ to exploit in the area.
On a separate note, residential transaction values were expected to remain strong in CY11 with a 18 per cent increase y-o-y. This was in accordance to analysts coverage of more than 15 per cent increase y-o-y in sales targets for 2011.
Despite the optimistic outlook on this sector, analysts projected a more moderate residential transaction value growth of five per cent y-o-y for CY12. Similarly, the research house expect developers to assume unexciting flat-to-single digit sales growth for 2012 due to high base effects.
Kenanga Research pegged SP Setia Bhd and Mah Sing Group Bhd fair value at RM4.68 and RM2.87 per share respectively. The research house pegged the target price for IJM Land Bhd of RM2.74 per share, Eastern & Oriental Bhd at RM1.53, KLCC Property Holdings Bhd at RM3.35, Hunza Properties Bhd at RM1.65 and Axis REIT at RM2.39.