KLCI : 1,825.64
Slower sales as weaker demand meets rising supply; but house prices should hold up with cost-push
Risks lie in Iskandar high-end condos, KL office & small built-up hybrid segments
Prefer township developers & investment asset owners.
Top picks: MKH, E&O, WTM
Dark clouds looming. We expect 2014F property sales to decline by 5-10% dragged by slower volume although prices will likely hold up due to cost push (as seen in the past during periods of sharp spikes in inflation). House price growth may moderate to 3% p.a. (9M13: +12.5%) as rising new supply meets weaker demand. Sentiments should remain subdued (at least in 1H14) given recent tightening measures and inflationary pressures. Potential interest rate hike could dampen disposable income further (every +50bps, affordability -1.6ppt). While developers may hold back launches and offer more incentives which will eat into margins, earnings visibility should be intact given current large unbilled sales.
Watch out for pressure points. Rising building material costs and tight foreign labour supply could heighten execution risk and dampen developers’ margins (challenging to pass on to buyers amid softer demand). There is no property bubble for now but we fear an oversupply of KL office space, hybrid high-rise units and Iskandar Malaysia high-end condos. Government projects with high import content and low multiplier impact may also be delayed (but MRT lines 2 & 3 should proceed as planned).
Prefer township developers which should benefit from resilient demand for landed and affordable housing. Conglomerates and investment asset owners should also see earnings holding up. We view IOI Properties as the new sector bell-weather given dearth of large-cap entrepreneurial-driven developers. Sector P/RNAV is trading below historical mean which may have partly priced in potential headwinds, but it still lacks re-rating catalysts in the short-term. We cut TPs across the board (based on 40- 55% discount to RNAV) to factor in weaker sector outlook.
Top pick: MKH given large exposure to affordable housing and landed residential in Kajang-Semenyih growth corridor (beneficiary of upcoming MRT) along with strong earnings growth potential from rising plantation contribution. Our other top picks: E&O (potential strong re-rating from STP2 approval & Medini launch) and Wing Tai Malaysia (resilient earnings from retail & Penang mass residential). We’ve downgraded SP Setia to Fully Valued (from Hold due to heightened execution risk) and YTL Land to Hold (from Buy due to high exposure to high-end condos around KLCC).
Publish date: 13/02/14