Property stocks in consolidation mode


THE general consensus among property consultants and analysts are that property stocks on Bursa Malaysia are either fairly valued or slightly over-valued compared with those in other countries in the region, based on their growth prospects and earnings per share.  

While not disputing that some property stocks might have good earnings potential, most analysts are of the view that property stocks would remain in a consolidation mode for some time. 

A property dealer said the soft market sentiment towards property stocks, coupled with concerns over rising interest rates as announced recently by Bank Negara to curb inflation, would affect most sectors, including property.  

The take-up rate of Glomac’s Suria Stonor condominium has been impressive

“I think this is why most property stocks are lower,” said the dealer from a local brokerage. 

A property analyst with AmResearch said property stocks in general, especially the smaller capitalised ones, had been under-performing for over a year. 

“There are exceptions, though. Some property developers like Mah Sing have performed within or above analysts' expectations,” she said, adding, however, that investors and punters were generally cautious about investing in property stocks. 

She said Mah Sing Group Bhd was perceived as a “decent” property stock despite its asset size. 

“While Mah Sing may only have a land bank of 355 acres, its ability to secure prime locations and achieve take-up rates of 85% has been impressive.  

“The company appears to adopt a different strategy in growing its business and has the ability to acquire parcels of land, which can be readily launched, thus mitigating holding costs and freeing cash flow,” she said. 

The analyst continued: “Mah Sing’s fast turnaround time from acquisition of land to launch allowed it to generate a high return on equity of 21% in financial year (FY) 2005, compared with the sector’s average of 13.1%.”  

She said the company was fundamentally strong and was expected to perform well in the coming months.  

Mah Sing posted a 102% jump in net profit to RM14.1mil in its third quarter ended Sept 30 compared with the same quarter last year. 

SP Setia, the developer of Setia Eco Park township in Shah Alam, saw its shareprice drop despite having strong earnings

An analyst with K&N Kenanga said even leading property developers such as SP Setia Bhd that normally performed well (in terms of earnings growth), came under pressure. SP Setia's share dipped 16 sen to close at RM3.16 on Friday last week. 

“The dip in price for such a strong developer is likely a knee-jerk reaction to the announcement of interest rate increase,” he said, adding that the company was fundamentally strong and its earnings growth in the longer term should not be significantly affected by the interest rate hike. 

The analyst said, however, some developers may feel the new property launches would have to be deferred due to potentially slower uptake by buyers because of the interest rate hike. 

“Even reputable companies like SP Setia are facing challenging times, what more smaller property developers?” he said, adding that this phenomenon reflected how tough the property market was, whose problem was compounded by a lacklustre stock market. 

A Singapore-based property consultant concurred with the K&N Kenanga analyst, saying that property developers needed to ensure that profit margins were within an acceptable range before commencing on mega projects due to longer gestation period, which could run into three to five years. 

“These developers may be hit by rising costs of raw materials like sand, cement and steel which could eat into their profit margins.  

“Moreover, rising holding costs on land acquisitions, project delay or lack of skilled workers are major concerns for developers, especially those with inadequate cashflow,” he said, adding that there was a lot of risks involved in property development. 

He said that today, it was getting more common for some developers, especially those with substantial land bank, to tie up with established property developers to jointly develop a mega project. 

“It’s a business partnership that draws on each other's strength to reduce development costs to achieve a viable profit margin,” he said, noting that both developers would rather share profit than incur a loss by going independently on the mega development. 

The consultant said it was a win-win situation for a developer with huge land bank to fast-track a mega project. This is to reduce the holding costs of the land and allow profit-sharing with an established developer to ensure good uptake by investors. 

“These are the strategies that smart developers are pursuing to remain competitive in tough market conditions,” he said. 

According to him, the established developers would only be looking to develop properties in prime locations with good commercial potential. 

Otherwise, he said, developers would prefer to go for smaller projects but in niche markets like high-end gated-community housing projects in prime locations to reduce risk. He cited Glomac Bhd as an example with its Suria Stonor development 

Mah Sing has performed to analysts’ expectations, with successful projectssuch as Damansara Perdana

Analyst Alvin Tai of OSK Securities said the take-up rate for Glomac's new project at Suria Stonor as at end-September was an impressive 67%, with the smaller units – those below 3,100 sq ft – achieving a 92% take-up rate. The gross development value of the project is believed to be RM300mil. 

He said the bulk of the company’s earnings would come in at the end of the current financial year. Glomac had been growing from strength to strength and should not have any problem attracting buyers because of its “creative designs,” he added. 

Tai has a “buy” call on Glomac and places a 12-month target price of RM1.96 on the company’s stock, which is an 83% premium to its close of RM1.07 last Friday. 

He added that the price of RM1.96 was still a 30% discount to the company’s revised net asset value of RM2.80 per share. “The worst may be over for Glomac. Going forward, the company should deliver better margins on its projects due to good diversification”. 

For the first quarter ended July this year, Glomac posted a net profit of RM4.4mil net profit on sales of RM46.5mil. 

The Singapore-based consultant said: “Overall, it is still a bearish market with most property stocks underperforming. But if one really searches hard enough, there are hidden gems waiting to be discovered.” 

The National Property Information Centre (Napic) reported that housing property stocks for the first quarter started with the construction of 3,823 and 3,757 condos and apartments in Kuala Lumpur and Selangor, respectively. However, the second quarter saw a drop to 1,609 and 3,526 units in KL and Selangor, respectively. 

Napic also found that at the end of the first half of this year, planned supply of condos and apartments in KL and Selangor stood at 20,852 and 42,779 units, respectively. (“Planned supply” refers to the number of units with building plan approvals but where construction has not begun.) 

The Property Index at the start of the year (Jan 3, 2005) was at 712.29 points and reached a high of 738.47 points on Feb 17. It then fell to its lowest level so far this year, at 526.10 points, last Friday before closing the day at 529.76 points.  

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