AmWatch - Property Sector : Making a case to Overweight property equities OVERWEIGHT, 4 Apr 2014

SECTOR FOCUS OF THE DAY

Property Sector : Making a case to Overweight property equities              OVERWEIGHT

We reaffirm our OVERWEIGHT stance, and BUY ratings on developers Mah Sing Bhd, Eastern & Oriental and IJM Land. We are NEUTRAL on M-REIT due to rising long bond yields, which have yet to peak. MRCB is a BUY as the group emerges from its restructuring initiatives to be more property-centric. In the small-caps space, we see deep value in Global Oriental Bhd (Not Rated), with ample scope for NAV growth from rising land values in Batu Kawan.

We are unmoved by talks of a slowdown in residential transactions due to supply-side reasons as well as policy restrictions, which are surely by now well discounted by the market; developers are already trading at the bottom-of-the-cycle discounts of between 40%-50% to NAVs. We sense that sentiments on property equities may be turning the corner due to three reasons:- (i) The property equities’ relative underperformance since June 2013 (see chart); (ii) Compelling valuations with discounts to NAVs at trough levels (see table); and (iii) Scarcity of investment ideas – the big-caps FBM KLCI stocks are trading at or close to fair values.

More importantly, the recent spate of landbanking activities by established developers at increasingly higher land price is helping to restore confidence. Notable examples include Mah Sing’s acquisition of a Shah Alam land (worth RM 327.4mil) and a large private developer’s RM470.7mil purchase in Canal City from Tropicana.  Meanwhile, E&O is in the final stages of regulatory approvals before it commences the massive reclamation project for Seri Tanjung Pinang II in Penang. These land deals, taken together with rising construction costs, underscore our conviction that residential prices would not fall due to the ascendancy of replacement costs. We are still not keen on M-REIT despite the share price retracements. Our concern continues to centre on rising long bond yields (currently the yield on the 10-year MGS is about 4.1%).

Others :

Felda Global Venture : No drought in Lahad Datu so far  HOLD

QUICK TAKE

Felda Global Venture : To list non-core subsidiaries          HOLD

NEWS HIGHLIGHTS

Sime Darby : To assist in S. African probe

Alliance Financial Group : Hwang-DBS sells 51% stake in unit to AFG

Boustead Heavy Industries Corp : To build first littoral combat ship in 2015

CapitaMalls Malaysia Trust : Sees minimal impact from GST, hikes

Telekom Malaysia : Financial leverage to weaken, but within S&P tolerance level

Media Sector : Audit Bureau of Circulations to equip media with the concept of convergence

DISCLAIMER:

The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice.