Property stock valuations to remain 'submerged'

KUALA LUMPUR: Inventory clearing efforts and REHDA's commitment to lower house prices by 10% is negatively impacting earnings in the property sector. 

In its Thursday sector update, Kenanga research said the KL Property Index declined by 26% in 2018, underperforming the FBM KLCI, which fell 7%.

This marked the fourth year of underperformance against the broader market, it said.

For the first quarter of 2019, Kenanga will be looking towards the Affordable Housing Expo 2019 and P2P lending scheme regulations by the Securities Commission for indications of where the property sector is headed.

"At this juncture, we expect current sales and earnings trajectory to be lacklustre - our universe’s total sales/earnings trajectory are expected to be at -4%/-15% YoY in FY18/FY19 and +2%/+13% YoY in FY19/FY20, respectively," said Kenanga.

It added that valuations are low given issues with earnings quality and no significant signals of ROE recoveries.

"With earnings quality still being subjected to pressures and achieving local sales targets are still challenging due to the massive housing overhang in the market, we see no compelling recoveries in developers’ ROEs in the next 12-24 months; hence, we expect valuations to remain ‘submerged’".

Kenanga advised investors looking to take positions in developers with low valuations to expect uncertainties and earnings quality risks which may affect share prices over the next 12 to 24 months.