Kenanga Research Neutral on property, SP Setia top pick


KUALA LUMPUR: Kenanga Research has reiterated its Neutral call on property developers with a slight negative bias, it said in a note on Tuesday.

It has named SP Setia as its top pick, premised on potential M&A news and bullet recognitions from its overseas projects.

It said that those with pending M&A activities like IJM Land and Sunway are also relatively safe bets.

While it still liked small-mid cap players like Matrix and Hua Yang, it thinks there will be more compelling entry points post GST implementation as much of the negatives would have been priced in.

“The recent sell down has sent valuations to below mean or towards trough levels as average RNAV discounts widened to 51% (3Q14: 42%) vs. historical highs of 54%.

“However, we believe the time is not ripe for bottom-fishing across the board as the sector lacks fresh catalysts over 1H15 while sector risks are outweighing rewards, unless investors have more than 9-12 months investment horizons.

“Hopes of a pre-GST demand rally have been squashed by buyers’ wait-and-see attitude and tighter lending liquidity, which will unlikely abate in 1Q15,” it said.

The research house said developers are likely to see flat to declining sales over 2015 and even affordable players will not be spared, meaning there is another 1-2 more quarters of earnings downgrades by consensus.

“Our analysis indicates that the two-year mini bull-cycle for the sector is over i.e. the KLPRP index is expected to underperform the FBM KLCI over 2015.

“There is also risk of a structural de-rating in the sector due to GST where secondary properties may steal the limelight away from primary ones; we will have to reassess the situation post GST implementation,” it said.

In a challenging market, Kenanga said it will give way to more land banking and is likely to be more visible in 2H15.

“This also increases the odds of more cash calls for developers with a higher-than-average (0.3x) net gearing level. The sector will be volatile over 1H15 and we advise investors to be selective,” it said.


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