Despite gloomy property sector share price of some property companies could rise

PETALING JAYA: Despite the gloomy outlook for the property sector, CIMB Research said that the stock prices of some property companies could rise, “even if actual property sales continue to decline”.

CIMB upgraded the sector from “neutral” to “overweight” and said that the valuation of property stocks had fallen to a level not seen since the last global financial crisis.

CIMB said observations about the past performance of the KL Property Index (made up of the listed shares of property companies) showed the index could rise even if the actual sales were still in a declining trend.

“We expect property sales to be weaker year-on-year in first half of 2016 but to recover in the second half of 2016 on the back of improved economic conditions.

“If history repeats itself, now could be the time to accumulate property stocks for maximum upside,” CIMB said.

Year-to-date, the KL Property Index has fallen by 14%, underperforming the FTSE Bursa Malaysia KLCI by 8%.

The research house pointed out that the valuation of property stocks have fallen to a level not seen since the last global financial crisis.

It noted that Eco World Development Group Bhd was trading at a 50% discount or more to its revalued net asset value (RNAV). “During the height of the last financial crisis in 2008, then-bellwether SP Setia Bhd’s discount only briefly touched 40% before narrowing.

“While the near-term outlook for property sales is unexciting, in our view, the fundamentals of the sector, especially for houses priced between RM700,000 to RM1mil, are not as dire as perceived by many. We are also bullish about the prospect of the overall stock market. We expect the FBM KLCI to reach 1,900 points by end 2016. This bodes well for the property sector, as property is a high-beta play,” CIMB said.

In view of the potential for stronger property sales in the second half of 2016, CIMB has narrowed the target RNAV discounts for property stocks it covers to a maximum of 60% from 70% previously.

However, the research house cut its FY16 earnings per share forecast for some of the property stocks by up to 33% as it anticipated a challenging environment in first half.

“We expect 2016 to be challenging for the property developers due to macroeconomic headwinds. However, in our view there is still demand for housing that the developers could tap into.

“Also, despite the concerns of housing bubble and oversupply of houses, we believe the sector’s fundamentals are much better than as perceived by many,” CIMB said.

Eco World remained CIMB’s preferred pick for the sector as it believed the property company’s sales target of RM4bil for FY16, one-third higher than that in FY15, is achievable.

It added that strong sales could be the re-rating catalyst for the stock.

“We also upgrade Eastern & Oriental Bhd (E&O) and UOA Development Bhd to “add” from “hold”. E&O’s share price could re-rate due to news about its Seri Tanjung Pinang 2 project, while UOA Development’s share price could rise on the back of stronger earnings and stable dividend payment,” it said.

CIMB explained that its view on the property sector rested on the belief that Malaysia’s economic growth will pick up pace heading into the second half of 2016.

“If our assumption turns out to be overly optimistic, income growth could stagnate and property sales might bottom later rather than sooner.”

Meanwhile, Maybank Investment Bank Research said it is slightly trimming Eco World’s net profit forecasts after revising its take-up assumptions for Eco Terraces and Eco Marina, the group’s two upcoming projects in the northern state.

“We trim our FY16/17/18 net profit forecasts by 0.6%/1.2%/3.8% respectively to factor in slower take-up assumptions for Eco Terraces and Eco Marina,” Maybank said in a recent report.

It has maintained “buy” recommendation for Eco World with a fair value of RM1.67 per share after factoring in slower take-up assumptions for the group’s properties in Penang.