Property stocks may see rising valuations as investors watch for recurring income, says RHB IB

• In particular, developers with growing recurring income and investment portfolios may see rising investor interest, the research house said in a sector note. While valuations of big-cap property stocks will likely stay elevated, some smaller-cap quality developers may catch up, the research house said.

KUALA LUMPUR (Jan 3): Malaysia’s property developers may see their valuations rise further even after 2024’s strong rally, with stocks in the high-risk-high-return sector continuing to perform, said RHB Investment Bank.

In particular, developers with growing recurring income and investment portfolios may see rising investor interest, the research house said in a sector note. While valuations of big-cap property stocks will likely stay elevated, some smaller-cap quality developers may catch up, the research house said.

“Valuations of these companies should be re-rated further, given their better earnings quality and stability going forward,” RHB said. "We believe the underlying asset values are the key factor supporting valuations, as opposed to the cyclical property development business.”

Bursa Malaysia Property Index, which tracks 97 stocks in the sector, have risen 32% last year thanks to the involvement of select companies in the highly-lucrative data centres business and industrial projects that provide recurring income from rental of factories.

The 20 largest property developers by market capitalisation have delivered an average total return of 57% compared to the 16% gain recorded by the subsequent 20 firms. Still, the sector is trading at a 48% discount to their realisable net asset value, RHB noted.

Developers that have expanded into new businesses to grow after a slowdown in the housing market over the past five years include Sunway Bhd (KL:SUNWAY) and IOI Properties Group Bhd (KL:IOIPG).

Take position in developers with new businesses

For strategy, investors should start to take positions in the likes of Sime Darby Property Bhd (KL:SIMEPROP), Mah Sing Group Bhd (KL:MAHSING, and Matrix Concepts Holdings Bhd (KL:MATRIX), RHB said.

“These players have been able to take advantage of their existing landbank and monetise them by developing income-yielding assets,” the house said.

RHB, which maintained its “overweight” call on the sector, believes that smaller-cap developers —particularly those with strong sales, solid finances, strategic landbank and niche projects — are likely to close the valuation gap with their larger peers this year.

Some of the more aggressive developers have also embarked on industrial development projects, RHB said, noting that consistent sales performance and earnings delivery would drive their share prices.

Aggregate property sales have been flat between January and September in 2024, with most developers likely to set sales targets for 2025 that are 5% to 10% higher than their 2024 targets, according to RHB.

Developers are expected to focus on mid-range high-rise residential products to manage landbank and address affordability concerns, RHB said, adding that some will continue with their existing strategy, expanding their offerings of commercial and industrial products.

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