Beaten-down property stocks at bargain levels

  • Business
  • Saturday, 20 Oct 2018

JUST over seven years ago, the KL Property Index (KLPI) was trading at the exact level where it is trading today.

At the same time in October 2011, the FBM KLCI was trading at 1,428 points. Fast forward to today, the FBM KLCI was last observed at 1,738 points based on Thursday’s close, up some 22% over the past seven years while the KLPI is basically flat. In fact, the KLPI has underperformed mostly in 2018 itself as the index is down some 27% since the start of the year while the KLCI is down 3.3% year-to-date.

What has caused the loss of confidence in the property sector to the extent that it has underperformed the FBM KLCI this year so significantly?

We all have heard about the slow property market, the continuous rise in unsold properties as well as prices that don’t seem to reach the masses as affordability remains a key concern in the sector. This week’s Khazanah Research Institute’s report showed glaring discrepancy between the haves and have nots as households earning below RM2,000 per month are left with just RM76, inflation adjusted, after paying their respective consumption expenditure.

Luckily, Malaysia’s median household income of RM5,228 in 2016 is still “relatively healthy” as about 67% is spent on household expenditure, leaving one-third of income for other purposes. With low levels of income, it is becoming increasingly difficult for the masses to be able to own a home, mainly due to the rising home prices.

According to the National Property Information Centre (Napic), based on its second quarter 2018 data released early this week, the Malaysian House Price Index (HPI) stood at 189.5 points, down 0.9% q-o-q and only just 1.7% higher y-o-y. What was telling from Napic’s data is that the second quarter data point is the slowest pace of growth in the HPI on a y-o-y basis and for the first time showed a contraction on a q-o-q basis. The index is based on its base value of 100 points in the first quarter of 2010.

The drag in the HPI was mainly attributable to the poor performance from prices in Kuala Lumpur as prices fell by 2.1% q-o-q and 0.6% y-o-y. Within the HPI, it was also interesting to note that based on types of homes, terrace houses posted a 0.1% increase on a q-o-q basis and higher by 5.5% y-o-y.

On an annual basis, although most states posted gains of between 1.2% and 9.2% y-o-y, two states, Penang and Pahang witnessed a fall in the terrace home segment with a drop of 1.1% and 2.4% y-o-y respectively. Compared with the preceding quarter, the performance among the states varied with changes of between -2.6% and +3.2% q-o-q.

For high rise units, the price index exhibited a different picture altogether. The index for high rise dropped 2.3% q-o-q and 2.8% y-o-y to 191.2 points. For the second quarter period, states posted changes of between -5.6% and +6.9% y-o-y basis and between -3.8% and +2.3% q-o-q basis.

The HPI data basically shows that prices are not only consolidating but perhaps dropping at the same time, which reflects the current oversupply and overhang that we are witnessing in certain market segment, especially in terms of location and types of products. But how does this impact listed property companies?

As mentioned earlier, the KLPI is at a seven-year low and although the market is fundamentally weak due to the mismatch of demand and supply, valuations of property stocks have become rather attractive as they trade at multi-year lows, especially among the larger capitalised listed players.

The KLPI has a total of about 100 companies in the index and some 18 of them are deemed to be large capitalised companies with market capitalisation of RM1bil and above. For valuation purposes, the revalued net asset value (RNAV) is an accurate and reflective value of a property company and RNAV typically is much higher than book value of property companies.

Nevertheless, in today’s scenario, due to the weak market sentiment and oversupply, we have a situation whereby 16 out of the 18 top listed properties companies are trading at prices below even their respective book values and obviously way off their respective RNAV levels.

In addition, most of them, if not all, remains profitable while in terms of net gearing level, except for two net cash companies, net gearing range between 3% and 80%. Not surprising, at a time when market sentiment is weak, the stronger players in terms of balance sheet strength, judged by low net gearing or net cash, tends to trade at a higher price-to-book multiple while weaker net gearing companies tend to trade at lower multiples.

The table shows that the Top 5 largest capitalised companies, which are SP Setia, IOI Properties Group, Sime Darby Properties, UOA Development and UEM Sunrise are within a trend line that largely explains that when balance sheet levels deteriorate, share prices tend to suffer as reflected in the price to book ratios.

Balance sheet, in terms of net gearing will deteriorate when market is weak as property players perhaps would need to raise new funds to maintain the development of their projects while at the same time inventory tends to rise due to oversupply, resulting in lower cash holdings. Outside the Top 5, some of the larger property companies are outliners, especially ECO WORLD, IGB, MRCB, LBS and Selangor Properties.

With the KLPI at a fresh seven-year low and as we come closer towards year-end, one cannot rule out potential window dressing among some of these companies as most of them are either owned by institutions like PNB or Khazanah or the very least supported by strong individuals or institutions.

Hence, while market sentiment is weak among property companies, current valuation looks rather attractive for value buys for investors. Indeed, some of these beaten-up large capitalised property related companies are now at bargain levels.

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