Share
• Belated re-rating of property stocks in Malaysia. Thus far this year, property equities have underperformed the rising market despite physical transaction volumes rising with consistently strong pricing trends. YTD, sector stalwarts – SP Setia and IJM Land, have underperformed the market by 1% and 6.9%, respectively.
But we are unmoved given our expectation that the disconnection between the robust physical market and valuation of property equities will soon reverse. In our opinion, property equities may be fast approaching an inflexion point - of a sustained share price re-rating cycle on several counts:
attractive compare to IJM Land.
The latter is trading on a much cheaper forward FY11F PE of 12x, and also a wider discount of 41% to our estimated fully diluted NAV of RM4.00/share. But SP Setia is still the property sector’s bellwether due to its larger market capitalization of RM 4.5bil versus IJM Land’s RM2.6bil.
Hence, SP Setia will be re-rated along with IJM Land because of its traditional status as a big-cap proxy to the property sector. We are BUYers of both SP Setia and IJM Land although we prefer the latter on valuation and its steeper underperformance.
• We are also BUYers of Ivory Properties Group. Ivory is a pure proxy to the robust residential market in Penang because of its strategically located prime development sites and astute deal makings particularly in successfully reviving “abandoned” projects. It has strong localised knowledge and an impeccable execution track record, with quick turnaround time. It is at the forefront of urban renewal in Penang. We see scope for transformational growth from the large NAV-accretive land deals under negotiation. Its activ e acquisition pipeline should generate strong news flow momentum, which will underpin share price performance. Valuations are attractive - trading on a forward FY11F PE of just 4x, and 54% discount to our NAV of RM2.70/share.
• Deep mis-pricing of IJM Land-WA provides opportunity for leverage trade on IJM Land. It is interesting to note that the market is currently mis-pricing IJM Land-WA. IJM Land-WA is currently trading about RM1.00/warrant. Exercise price is RM1.35/warrant and the warrants will only expire on 11 September 2013. Break-even price is therefore RM2.35/warrant, a tad below IJM Land’s current share price of RM2.36/share. As such, the market is currently not assigning any time value at all for IJM Land-WA (See Table 3).
In contrast, SP Setia-WB will expire a tad earlier on 21 January 2013. Yet, SP Setia-WB is currently trading at a steep 15% premium to its break-even price of RM5.06/warrant - as the underlying SP Setia’s current share price is RM4.42/share (See Table 2).
But we are unmoved given our expectation that the disconnection between the robust physical market and valuation of property equities will soon reverse. In our opinion, property equities may be fast approaching an inflexion point - of a sustained share price re-rating cycle on several counts:
- (1) Interest rate drag on valuation is already behind us. Property equities tend to underperform at the early stages of an interest up-cycle because of an associated increase in property risk premium from a higher discount rate in NAV valuation. With three sequential hikes in the Overnight Policy Rate to 2.75% this year, we believe that the interest rate drag on valuation is already behind us, at least for the next 12 months. Focus will now shift to growth kicker on residential demand from an expanding underlying economy, and not interest rate.
- Proposed introduction of IFRIC 15 may be delayed. The uncertainty over earnings recognition on presales from the proposed introduction of IFRIC 15 appears to be overplayed. Technically, valuation of property equities should not be adversely impacted because cash flows remain constant, although accounting profits may be volatile - depending on the timing of physical completion. Furthermore, IFRIC 15 is still being debated by various parties with vested interests including REHDA. In our opinion, the proposed introduction of IFRIC 15 may be delayed for perhaps two years to ease the transition period for developers, like in Singapore.
- Asian property stocks have started to outperform rising markets. Property equities in the region have started to outperform rising markets in recent months. Bellwether property stocks like City Developments in Singapore and Sun Hung Kai in Hong Kong have been outperforming the respective market index. Historically, large-cap sector bellwethers will be the first to be re-rated by the market - as institutional investors look for liquid proxies to the property market. Strong underlying demand fundamentals, ample property liquidity and easing concern over policy risks underpin this belated rerating.
- Strong news flow momentum from redevelopment of MRB’s prime land in Sungai Buloh. We expect the redevelopment of the Malaysia Rubber Board’s (MRB) highly sought after land (3,400 acres) in Sungai Buloh to propel property stocks into the limelight. The Employees Provident Fund (EPF) has been appointed as the master developer of the land. The Government is expected to announce the project manager/consultant to advise EPF on how to maximise the development potential of the land - because of its strategic location, it is sandwiched between three mature residential neighbourhoods – Damansara, Subang and Sungai Buloh. Redevelopment of this 3,400-acre piece of land will essentially integrate the three mature townships. The immediate development potential is extremely significant. In our opinion, EPF may carve out select parcels to co-develop with established developers.
- Rising transaction volume to underpin NAV upgrades from stronger pricing power. We expect a broadening in residential demand, with a return of pent-up buying in the mass housing market - forming a stronger base to rejuvenate the upgraders’ cycle after a lull of more than two years. As it is, developers are already looking to accelerate presales. For example, SP Setia is confident of achieving its all-time record presales of RM2.0bil this year. IJM Land has already achieved more than RM1.0bil in new presales this year. Transaction volume - a key share price driver, should continue to rise. In turn, this will provide the fundamental underpinning - for a sustained property price appreciation and by extension, NAV upgrades.
attractive compare to IJM Land.
The latter is trading on a much cheaper forward FY11F PE of 12x, and also a wider discount of 41% to our estimated fully diluted NAV of RM4.00/share. But SP Setia is still the property sector’s bellwether due to its larger market capitalization of RM 4.5bil versus IJM Land’s RM2.6bil.
Hence, SP Setia will be re-rated along with IJM Land because of its traditional status as a big-cap proxy to the property sector. We are BUYers of both SP Setia and IJM Land although we prefer the latter on valuation and its steeper underperformance.
• We are also BUYers of Ivory Properties Group. Ivory is a pure proxy to the robust residential market in Penang because of its strategically located prime development sites and astute deal makings particularly in successfully reviving “abandoned” projects. It has strong localised knowledge and an impeccable execution track record, with quick turnaround time. It is at the forefront of urban renewal in Penang. We see scope for transformational growth from the large NAV-accretive land deals under negotiation. Its activ e acquisition pipeline should generate strong news flow momentum, which will underpin share price performance. Valuations are attractive - trading on a forward FY11F PE of just 4x, and 54% discount to our NAV of RM2.70/share.
• Deep mis-pricing of IJM Land-WA provides opportunity for leverage trade on IJM Land. It is interesting to note that the market is currently mis-pricing IJM Land-WA. IJM Land-WA is currently trading about RM1.00/warrant. Exercise price is RM1.35/warrant and the warrants will only expire on 11 September 2013. Break-even price is therefore RM2.35/warrant, a tad below IJM Land’s current share price of RM2.36/share. As such, the market is currently not assigning any time value at all for IJM Land-WA (See Table 3).
In contrast, SP Setia-WB will expire a tad earlier on 21 January 2013. Yet, SP Setia-WB is currently trading at a steep 15% premium to its break-even price of RM5.06/warrant - as the underlying SP Setia’s current share price is RM4.42/share (See Table 2).
SHARE
