Kenanga: Lack of catalysts weighing on developers’ outlook

KUALA LUMPUR: Local property players, especially governmentlinked companies (GLCs), are expected to go for mergers and acquisitions (M&As) amid the sector’s lower valuation.

Market observers said Bursa Malaysia’s Kuala Lumpur Property Index had fallen 17 per cent yearto-date and sectoral stocks were trading below their book values.

Kenanga Research said although their valuations appeared compelling, there was no clear catalyst in sight with issues weighing down the sector.

It added that the stocks were approaching historical peak level of 68.7 per cent, which was below their book values.

“Earnings quality has deteriorated, given several downward earnings revisions over the last few quarters, driven by margin compression issues arising from inventory clearing efforts.”

Kenanga Research said developers’ return on equities (ROEs) had continued to weaken. This was more severe than the ROE trends of supporting sectors, namely construction and financials.

“We see no near-term catalysts and expect most developers’ share prices to range-bound at current levels pending the 2019 Budget announcement on November 2, or if there are earlier announcements on housing policies or lending requirements,” it said.

While small and mid cap players were trading at very low price-by-volume, Kenanga Research said companies were less likely to undertake any privatisation exercise in order to retain their listing status for branding and positioning in the market.

“Privatisations are likely if there are other listed mother/sister companies while M&As tend to be strategic, likely involving GLCs.”

It said the government had recently launched the National Housing Policy 2.0 to balance between affordable housing needs and current oversupply situation from a primary and secondary market perspective.

“We are curious how the financing hurdles for first-time house buyers will be addressed, considering the banking system’s current high exposure to real estate.

“The landscape for developers will remain challenging as we foresee fewer launches as the focus will be on inventory clearing, which means thinner margins.

“There is also pressure from the government to lower house prices due to the Sales and Services Tax (SST) exemptions and, perhaps, a more active secondary market.”

“We expect more margin compressions if developers are forced to drop house prices by up to 10 per cent.”

Kenanga Research maintained a “neutral” call on developers due to the anticipation of the lack of strong earnings or sales catalysts, which would help ROE recovery.

It said the property sector was awaiting the new national affordable housing policy, which would be good for the rakyat but might create more competitions in the market and result in even thinner margins.

“Pending the new national affordable housing policy, SST issues and 2019 Budget announcement, we believe the sector will be in ‘limbo’ as there are no clear catalysts while new policies could change the landscape for developers,” it added.

We expect more margin compressions if developers are forced to drop house prices by up to 10 per cent.

KENANGA RESEARCH