By CIMB Research
Tuesday, 04 January 2011 15:06 Bookmark and Share
Maintain overweight: The year 2011 promises to be an even better year for the property sector than 2010, which turned out to be a very good year. Fundamentals remain robust as many developers achieved record sales in 2010 and have even loftier sales targets for 2011. On the mergers and acquisitions (M&A) front, there was unprecedented activity as a few large M&As proposed towards the end of 2010 will change sector dynamics in a positive way and pressure the leading developers to do more. We expect developers to go for aggressive landbanking to kick up their expansion a couple of notches or take the even faster expansion route of M&A, or both.
We maintain our "overweight" weighting on the property sector and our "outperform" call on all the developers under coverage. KLCC Property remains our sole "underperform" as it is a property investment company which offers lower dividend yields than the REITs. S P Setia stays as a core holding and our top pick in the sector.
The property sector languished in 1H10, weighed down by the surprise 5% real property gains tax announced at end-09, concerns over impact of IFRIC 15 on earnings and worries about a cap on the loans-to-value ratio. But the sector started to outperform quietly in 2H10 on the back of record sales by many developers.
Three major M&A deals carried the sector further in November. These M&As will change the property landscape and create large liquid property companies that may even be included in the KLCI. The KLPRP Index ended 2010 as one of the best-performing sectors in Malaysia.
S P Setia is aiming for a mind-boggling RM3 billion in sales for FY11 while Mah Sing Bhd is going for a record RM2 billion in 2011. We believe the companies may exceed these seemingly ambitious targets. The two key determinants of property demand — the state of the economy and stockmarket — continue to head higher and affordability of residential properties is near its best. News flow for the sector will remain robust in 2011, as developers go aggressively after landbank and M&As to keep up with their peers. The property sector should enjoy the twin engines of solid fundamentals and strong news flow this year.
The glut of commercial space can only get worse as developers will be releasing more supply into the market. We are particularly concerned about the worsening oversupply of office space and hotels. This does not bode well for property investment companies like KLCC Prop. For investors seeking yield, we prefer Malaysian REITs in general and Axis REIT in particular. We remain bullish on all developers and see re-rating catalysts in: (i) record sales leading to a strong profit outlook; (ii) aggressive landbanking by leading developers; and (iii) further M&A activity that will quickly unlock the hidden value of landbank.
— CIMB Research, Jan 3
