Company Name: KLCC PROPERTY HOLDINGS BHD
Research House: KENANGA
Maintain trading buy: Malaysia's residential property absorption rates are still below the eight-year average. Overhang rates in Selangor and Johor have improved due to stronger demand and a decreasing number of new launches. General affordability is still looking good. All price segments are reporting improved sales, driven by low interest rates, liquidity, innovative financing schemes, high savings rates, favourable lending environments, property as a preferred inflation hedge, EPF Account 2 monthly withdrawals for the repayment of one house and pent-up demand from the upgraders market. We expect the residential sector to register a new record sales level of RM52.9 billion (+26% year-on-year) in 2010. Large developers under our coverage, like S P Setia, IJM Land and Mah Sing Group, are reporting record high 2010 sales.
Malaysian house price index (HPI) trends indicate general residential prices have grown steadily and are moving in tandem with the consumer price index. But we do observe landed residential prices have gained momentum though we think it is confined to certain 'hot spots'. Anecdotal evidence indicates a growing divergence between primary and secondary market prices. Already, some slight price corrections are observed, which we think is healthy for the long run. Nonetheless, residential prices will continue to maintain their long-term uptrend since replacement costs continue to rise.
The Klang Valley commercial segment's looming incoming supply of circa 18 million sq ft in the medium term should limit rental growth. There is significant incoming supply for both retail and office space over next three or four years. Retail expects another three million sq ft supply in 2H10, or 13% of existing supply, and there will be 14.9 million sq ft of new office spaces in the next three or four years, equivalent to 21% of existing supply. This will add pressure on occupancy rates while potential tenants are spoilt for choice.
The government is mulling over capping loan-to-value (LTV) ratios for third property purchases onwards, progressive real property gains tax (RPGT) and cessation of international accounting standards (IAS) financings. We think implementation of progressive RPGT and cessation of IAS financings will be detrimental to property sales and sentiment.
Property stocks are 'sales driven'. Without strong headline numbers, it will be tough for property share prices to maintain the current momentum. Although 2010 residential sales value for Malaysia is estimated to be a 24% y-o-y increase, we expect 2011 sales to grow 7% y-o-y due to 2010's high base effect. Developers under our coverage are waiting for clarity in Budget 2011 before determining their FY2011/12 sales targets but maintain they will be able to sustain current levels.
Catalytic news flow and ample liquidity could push the Kuala Lumpur property price index (KLPRP) to peak cycle valuations of 1.3 times price-to-book value (PBV) from current mid-cycle 0.8 times PBV. Positive news flow (for example the MRT project) and high liquidity from the inflow of foreign funds, attracted to the stronger ringgit, are key share price drivers.
Maintain 'trading buy' until policy worries abate post Budget 2011. We are tending towards a possible upgrade for the sector to 'overweight' if developers under our coverage can target 15% to 20% y-o-y growth in FY2011/12 sales.
Stick to developers with high news flow, which provide excellent trading opportunities. Strong branding goes a long way as these developers are more equipped to grab market share in the event of softer demand and policy uncertainties. We maintain: (i) 'buy' on Mah Sing Group (target price: RM2.20); (ii) 'trading buy' on Eastern & Oriental (TP: RM1.26); (iii) 'trading buy' on Hunza Properties (TP: RM1.76); (iv) 'hold' on KLCC Property (TP: RM4.42 [RM3.36 if Lot C valued at net book value]). We are reviewing our calls on S P Setia (TP: RM4.78) and IJM Land (TP: RM2.80) pending Budget 2011and their guidance for FY2011/12 sales targets. ' Kenanga IB Research, Oct 14
This article appeared in The Edge Financial Daily, October 15, 2010.