Review - Property Calling it A Day By the Kenanga Research Team l research@kenanga.com.my The property sector is expected to remain challenging for the year due to tighter lending liquidity, potential sector de-rating risks arising from implementation of GST and choppy local equity market arising from low crude oil prices and weakening MYR. The upcoming February reporting season should also see more "misses" than "hits". Property sales for FY15 is expected to be flat at best and those developers with very low exposures to mass housing may very well see their sale trends declining YoY. Currently, we prefer big-cap developers over under-researched smallto-mid cap ones as historical performance study indicated that the former tends to outperform the latter in volatile market. We recommend that investors take advantage of the current CNY rally to TOP SLICE the following counters; GOB, GLOMAC, GUOCO, IWCITY, MKLAND and SBCCORP, TITIJYA. Our valuation methodology has been switched to the more conservative PBV-driven method because RNAV plays are not as meaningful when the property market is sluggish. On that note, we are (i) trimming our FVs of the said stocks by 17%-58% which resulted in an across the board TRADING SELL call for all the stocks, and (ii) also CLOSING POSITION on them. Times will remain tough for the property sector. Following our 1QCY15 Property Sector Strategy report on 30-Dec-14, we highlighted that developers are likely to see more risks (e.g. for headline sales, earnings) while fresh catalysts are lacking. We think the market has yet to fully factor in headline sales and earnings risks and will require at least one to two more quarters of downgrades in earnings estimates. The more glaring issue is the current tighter lending environment which does not appear to be abating at the moment; this would further dampen expectations of a pre-gst demand rally. Post implementation of GST, there is likelihood that the sector may undergo a structural change whereby the secondary properties may gain traction over primary ones as replacement costs for the latter may significantly widen the gap between primary and secondary ones due to the inflationary multiplier effect from GST. Property sales to be flat at best to declining. As it is, 2014 average headline sales growth rate is expected to see a decline of 14% (based on the average of developers under our institutional coverage). As for next financial year s sales guidance, most developers are leaning towards the side of caution. We are expecting a slower 2015 with developers registering flat-to-declining property sales in FY15 due to: (i) buyers adopting a "wait-and-see" stance due to economic uncertainties and inflationary pressures, and (ii) tighter lending liquidity to the sector due to asset quality risks and the banking system s high loan-to-deposit ratio. Ahead of February-15 result season, we have slashed CY15 headline sales by 5%-34% to yield flattish sales growth for the year, which resulted in a more moderate growth rate of 9% on average for developers under our institutional coverage. Currently, the property stocks in our (OR) universe with Open Positions, indicates an average FY15E earnings growth of 22%, which implies there could be more headline sales and earnings risks in the upcoming February-14 results season. Big-cap developers preferred over small-caps. Based on our study of the daily YTD share price performances of developers from 2011 to 2014 on a yearly basis, we deduced that: (i) big-cap developers tend to perform better as compared to small-to-mid cap developers in a more volatile broad market, (ii) small-to-mid cap developers tend to outperform big-cap developers under a less volatile broad market situation. In general, under-researched small-to-mid cap developers share prices tend to fare worse during times of uncertainties as there is less visibility, more earnings volatility and lack of guidance on the stock; this also appears to be the case for property counters with low institutional holdings. Hence, we believe that the small-to-mid cap developers would have higher downside risks this year as compared to big-cap developers, especially when there is still plenty of meat for top-slicing (refer to Property Sector Report, 30-Dec-14). PP7004/02/2013(031762) Page 1 of 8
Take advantage of CNY rally to top slice property stocks. Our 2007-2014 KLPRP Index series analysis indicates that there is a trend leading up to February and following through during the CNY period; the exceptions were (i) 2008 due to GFC, and (ii) 2010 due to the reintroduction of RPGTs after a 3-year holiday. Pre-February/CNY rallies could be also due to the fact that most developers tend to announce their final dividends before year-end results (during the last 2 weeks of Feb), and most developers will pay out dividends either twice or once a year (except for MATRIX). We believe that the mini rally last week could be due to pre-february/cny effect which is typical every year. Currently, we are seeing a pre-february rally as the KLPRP has been picking up since 8th Jan 2015. Based on our historical trends study, such rally normally sustain up to 16 days at most, from the latter part of January to mid-february before consolidating or correcting. As such, we expect the rally to end by the second week of Feb-2015. Stick to mass housing or township players and avoid under-researched property counters. As such, we are turning highly selective on the small-to-mid cap players, whereby we prefer those that are well positioned in the mass housing or township segment due to resilient demand like HUAYANG and MATRIX. Even so, under our institutional coverage, we only have an OUTPERFORM call on MATRIX (TP: RM3.05) as valuations are still relatively compelling while HUAYANG (TP: RM2.20) has been recently downgraded to MARKET PERFORM as their share price has recently rallied beyond our TP. Small-mid cap property stocks like GOB, GLOMAC, GUOCO, IWCITY, MKLAND, SBCCORP and TITIJYA are not as well positioned in the mass market segment, i.e. not pure affordable housing or strong township players, while some of them are highly geared (GOB and GUOCO net gearing are above 0.5x). The property market is sluggish, RNAV plays are less meaningful. Our previous valuations of property stocks in our (OR) universe with Open Positions were based on discounts to RNAVs. However, we note that during bearish property cycles, investors tend to revert back to historical average PBV levels to determine the bottom. On this front, we are switching our valuation methodology to historical PBV basis. We are applying average to above average historical PBV on GOB, GLOMAC, GUOCO, IWCITY, MKLAND and SBCCORP. As for TITIJYA, their historical average is not representative as they have been listed for only one year or during the period when property sector s dynamics were more favourable than currently and thus, we have opted to use historical low PBV levels as a valuation point. As a result, we are (i) trimming our FVs of the said stocks by 17%-58% which resulted in an across the board TRADING SELL call for these stocks, and (ii) also CLOSING POSITION on these counters. Changes in CALL/FV (Part 1 of 2) Company Current Price (RM) Previous FV (RM) NEW FV (RM) NEW Valuation Basis Previous Call NEW Call GLOBAL ORIENTAL * 0.545 1.23 0.53 15% premium to 3-yr Historical Average P/BV (x) GLOMAC 0.995 1.27 1.05 3-yr Historical Avg P/BV (x) GUOCOLAND 1.32 2.95 1.35 3-yr Historical Avg P/BV (x) IWC 1.37 3.39 1.42 25% premium to 3-yr Historical Average P/BV (x) MK LAND 0.43 0.64 0.39 3-yr Historical Avg P/BV (x) SBC ** 1.01 3.24 0.97 15% premium to 3-yr Historical Average P/BV (x) TITIJAYA 1.94 3.14 2.02 1-yr Historical Min P/BV (x) * Previous FV based on cum-rights but New FV is based on ex-rights ** Previous FV based on cum-bonus but New FV is based on ex-bonus PP7004/02/2013(031762) Page 2 of 8
Changes in CALL/FV (Part 2 of 2) Company FV Rationale GLOBAL ORIENTAL GLOMAC GUOCOLAND IWC MK LAND SBC TITIJAYA Opting for above mean valuations as Mainland Penang, where GOB's landbanks are, has re-rated over the last 2 years, and hence, historical average may not be applicable. Most developers have corrected substantially over the last 2 months and many have dipped below their historical average PBV levels. We reckon that valuations will revert to the mean in general and range bound at those levels. Most developers have corrected substantially over the last 2 months and many have dipped below their historical average PBV levels. We reckon that valuations will revert to the mean in general and range bound at those levels. We are opting for above mean valuations as the group has recently secured a JV deal with Greenland which will enable them to unlock the value of their Tebrau Bay Waterfront City development which requires reclamation works as well. They will enjoy their portion of land disposal gains and share of development profits. This could re-rate the stock as they have been very quiet on the development front in the past, but will now be in full-swing due to their new partner. However, beyond the one-off land disposal gains, which could see potential special dividends, earnings from development from this new booster will only be felt much later on due to timing of launches and the current market situation. Most developers have corrected substantially over the last 2 months and many have dipped below their historical average PBV levels. We reckon that valuations will revert to the mean in general and range bound at those levels. Opting for above mean valuations as KK, Sabah, where SBC s crown jewel and major project driver is located, has re-rated over the last 2 years, and hence, historical average may not be applicable. The stock was listed close to a year ago, when the sector was fetching more premium valuations compared to current levels. Thus, we apply their trough PBV over their listed lifetime. Financial Snapshots Company PER (x) Net gearing (x) Net Profit (RM'm) Net Profit Growth FY13/14A FY14/15E FY15/16E LFQ FY13/14A FY14/15E FY15/16E FY14/15E FY15/16E GLOBAL 6.4 6.9 5.8 0.6 39 36 43-8% 20% ORIENTAL GLOMAC 6.7 6.5 5.8 0.2 108 111 125 2% 13% GUOCOLAND 6.0 18.6 14.0 1.2 153 49 66-68% 33% IWC 35.2 35.1 7.1 0.0 27 27 132 0% MK LAND 7.9 9.8 8.7-0.1 66 53 60-20% 13% SBC 7.1 7.5 5.5 0.1 33 31 43-6% 36% TITIJAYA 9.7 9.8 8.2-0.1 71 71 84 0% 18% Average 11.3 13.5 7.9-14% 22% This section is intentionally left blank. PP7004/02/2013(031762) Page 3 of 8
Daily Charting Global Oriental Bhd GOB has been consolidating post its multi-month down cycle, trading between RM0.50-RM0.60 over the past 2 months. Outlook remain lacklustre as shown by the flattish key indicators (MACD, Stochastic and RSI). On top of the lack of trading volume, we reckon that the share price could continue its sideways trading pattern in the near-term. Immediate support and resistance is capped at RM0.50 (S1) and RM0.60 (R1) respectively. Name : Global Oriental Bhd Bursa Code : GOB CAT Code : 1147 Resistance : RM0.60 (R1) RM0.63 (R2) RM0.67 (R3) Support : RM0.50 (S1) RM0.45 (S2) RM0.41 (S3) Daily Charting Glomac Berhad GLOMAC s share price is trapped between the immediate support and resistance of RM0.95 (R1) and RM1.04 (S1) after rebounding from the year's low of RM0.90 (S2) level. MACD indicator is painting a neutral picture with sideways movement whereas both RSI and Stochastics indicators are heading south to suggest negative buying momentum. Share price is expected to further range-bound due to the lack of catalyst while we see RM0.90 (S2) level to be a good entry point for investors. Name : Glomac Berhad Bursa Code : GLOMAC CAT Code : 5020 Resistance : RM1.04 (R1) RM1.13 (R2) RM1.24 (R3) Support : RM0.955(S1) RM0.90 (S2) RM0.85 (S3) PP7004/02/2013(031762) Page 4 of 8
Daily Charting Guocoland (M) Berhad Technically, GUOCO s share price is capped below the resistance level of RM1.42 (R1) as well as the 100-Day SMA trend line in tandem with low trading volume. MACD indicator is showcasing neutral to negative bias, while negative buying momentum is reflected by both Stochastics and RSI indicators which are trending downwards after touching the overbought territory. We expect the share price to trade range-bound moving forward between the resistance of RM1.42 (R1) and support of RM1.07 (S2), while awaiting fresh catalysts to spur the stock. Name : Guocoland (M) Berhad Bursa Code : GUOCO CAT Code : 1503 Resistance : RM1.42 (R1) RM1.57 (R2) RM1.77 (R3) Support : RM1.26 (S1) RM1.07 (S2) RM1.00 (S3) Daily Charting Iskandar Waterfront City Berhad IWCITY s share price has trading sideways for the past few days after a recent rally. Despite the share price being well supported by 20-day and 50-day SMAs, thin daily trading volume coupled with flattish in key indicators (MACD, Stochastic and RSI), are suggesting low interest in the stock. We reckon the share price could retests its immediate resistance of RM1.42 (R1) should buying interests build up, while immediate support is seen at RM1.34 (S1). Name : Iskandar Waterfront City Berhad Bursa Code : IWCITY CAT Code : 1589 Resistance : RM1.42 (R1) RM1.50 (R2) RM1.60 (R3) Support : RM1.34 (S1) RM1.24 (S2) RM1.07 (S3) PP7004/02/2013(031762) Page 5 of 8
Daily Charting MK Land Holdings Bhd Key indicators are still showing positivity from here, with the MACD and RSI indicator still trending strongly. However with the overbought situation shown by the Stochastic indicator, it could mean that the recent uptrend is capped. Thus we view that mid-term outlook depends on whether MKLAND could break above its 200-day SMA level. If the share price fails to break above this level, we believe the MKLAND could undergo a consolidation phase to neutralise its overbought situation. Name : MK Land Holdings Bhd Bursa Code : MKLAND CAT Code : 8893 Resistance : RM0.43 (R1) RM0.46 (R2) RM0.48 (R3) Support : RM0.40 (S1) RM0.37 (S2) RM0.35 (S3) Daily Charting SBC Corporation Bhd SBCCORP underwent a correction after its share price surged strongly to break above its 50-days SMA level. Key indicators are posting a less rosy picture from here, with the Stochastic indicator reversing from its overbought situation while the RSI is hooking downwards strongly. SBCCORP will look to retest the sustainability of its immediate psychological support level of RM1.00 (S1). If the share price break down from this level, it will be a long way down for the share price before it finds strong buying support at the RM0.87 (S1) support level. Name : SBC Corporation Bhd Bursa Code : SBCCORP CAT Code : 5207 Resistance : RM1.14 (R1) RM1.26 (R2) RM1.41 (R3) Support : RM1.00 (S1) RM0.87 (S2) RM0.80 (S3) Outlook : Bearish PP7004/02/2013(031762) Page 6 of 8
Daily Charting Titijaya Land Bhd TITIJYA had recently surge to break above its 50-day SMA level, but had since consolidated to neutralise its overbought situation. Near-term outlook appears uninspiring from here as depicted by the lack of trading volume and rolling over of the key momentum indicators (Stochastic and RSI). With that, we view that the share price could continue to consolidate further towards its immediate support of RM1.86 (S1) to find strong buying support at the level. Name : Titijaya Land Bhd Bursa Code : TITIJAYA CAT Code : 5239 Resistance : RM2.05 (R1) RM2.23 (R2) RM2.37 (R3) Support : RM1.86 (S1) RM1.78 (S2) RM1.55 (S3) Outlook : Bearish This section is intentionally left blank. PP7004/02/2013(031762) Page 7 of 8
Stock Ratings are defined as follows: Stock Recommendations OUTPERFORM : A particular stock s Expected Total Return is MORE than 10% (an approximation to the 5-year annualised Total Return of FBMKLCI of 10.2%). MARKET PERFORM : A particular stock s Expected Total Return is WITHIN the range of 3% to 10%. UNDERPERFORM : A particular stock s Expected Total Return is LESS than 3% (an approximation to the 12-month Fixed Deposit Rate of 3.15% as a proxy to Risk-Free Rate). Sector Recommendations*** OVERWEIGHT : A particular sector s Expected Total Return is MORE than 10% (an approximation to the 5-year annualised Total Return of FBMKLCI of 10.2%). NEUTRAL : A particular sector s Expected Total Return is WITHIN the range of 3% to 10%. UNDERWEIGHT : A particular sector s Expected Total Return is LESS than 3% (an approximation to the 12-month Fixed Deposit Rate of 3.15% as a proxy to Risk-Free Rate). ***Sector recommendations are defined based on market capitalisation weighted average expected total return for stocks under our coverage. This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies. Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) 8th Floor, Kenanga International, Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia Telephone: (603) 2166 6822 Facsimile: (603) 2166 6823 Website: www.kenanga.com.my Chan Ken Yew Head of Research PP7004/02/2013(031762) Page 8 of 8