M’sia in early stage of property ‘super cycle’

We believe we are seeing the beginning of what would perhaps be Malaysia’s biggest residential real estate boom in more than a decade with key insights being:
•     A major mass housing boom will likely occur in the first half of this decade;
•     We are in the early stage of a property “super cycle” led mainly by mid-to-high end landed properties which may peak sometime in 2012/13 and followed by a potential slump;
•     The current 20-year secular boom in mid-to-high end residential properties since the early 1990s may peak in 2012/13, after which mass affordable housing could dominate the real estate theme until circa 2015/16;
•     Stocks with focus in the mid-to-high end segment (eg Sunrise Bhd, YNH Property Bhd, IGB Corp Bhd and Bandar Raya Developments Bhd) are the best bets for the next 12 months prior to the 2012/13 potential peak.

Mass housing developers, especially the “fallen angels” such as LBS Bina Group Bhd and MK Land Holdings Bhd may come to the fore as another major investment theme after that.

For “best-of-all-worlds’’ exposure during this period, Buy SP Setia Bhd. Although the expected peak in 2012/13 may be followed by a slump, the phenomenal boom that immediately precedes gives investors an excellent opportunity to profit from the trend, at least for the next 12 months.

We therefore seize this opportunity to upgrade our property sector call to Overweight from Neutral.

A property “super cycle” is usually associated with a real estate mania. Although it can be a highly exciting period especially when one is reaping an enormous profit from it, a mania can also be devastating once it peaks. Therefore, “timing” is of the essence to avoid being on the wrong side of the trade when the property cycle turns. If the real sector is expected to enter into a phenomenal upcycle, the developers listed on the stock exchange should also naturally be expected to ride high on the boom. We therefore list the property stock picks based on the themes we presented earlier.

The investment themes
The winners during this upcycle between 2009/10 and 2012/13 are clearly the mid-to high-end developers, particularly those with prime focus in the developments of landed properties.
However, the current valuations of these developers do not appear to be reflecting this yet. The property investment portfolio in the next 12 months should be heavily weighted in property developers with main exposure to the developments of mid-to-high end landed properties such as SP Setia and Plenitude Bhd. As we are in the final phase of the boom in mid-to-high end residential properties, the buying list should also include those developers with focus on developing niche mid-to-high end non-landed residential properties such as Sunrise and YNH Property.

Pure mass housing developers were once considered the darlings of the sector until the segment’s implosion about six years ago, which nearly wiped out developers such as Talam Corp Bhd and MK Land. Some of these developers have been rigorously repairing their balance sheets and doing what is necessary to return to their glory days.

If they could indeed shape up in time for the upcoming major boom in mass affordable housing in the next decade, these developers are likely to enjoy increasing visibility among the investment community in the coming years.

Overweight on mid-to-high end developers
We foresee a strong upward re-rating in the valuations of these property stocks over the next few months. During the last property upcycle in 2007, the P/NTAs of most mid-to-high end residential property developers stood at as much as 3s above their respective historical mean.

That was the premium investors were willing to pay for developers which were expected to benefit from the upcycle. As the next upcycle from 2009/10 to 2012/13 will be more phenomenal compared to any we have seen since the Asian Financial Crisis, the valuations of these stocks should deserve to trade close to, if not surpass, their respective year 2007 highs.

Having said that, because the next upcycle will be led by mid-to-high end landed properties, the upward re-rating of the developers with primary exposure to the developments of such properties could be even more drastic vis-à-vis their high-end condo developer peers.

Sub-title: Timing is crucial.
An investor must be ready to adopt a somewhat shorter trading approach to benefit from our anticipated property “super cycle”. Being able to time the swing in the real property cycle is paramount during this period. As we believe that the valuations of Malaysian property stocks have yet to reflect the coming upcycle, we think now is the best time for the equity investors to aggressively accumulate stocks of mid-to-high end residential property developers, particularly those with prime focus in developing higher-end landed properties. These stocks are the investors’ best bets over the next 12 months, after which they should adopt a more cautious stance as we approach the expected peak in the real property cycle in year 2012.

SP Setia (Buy; TP RM6.31) One of Malaysia’s largest developers, SP Setia is currently thriving on the brisk sales of its mid-to-high end landed properties throughout the nation given its huge exposure in developing such properties. Therefore, it is likely to be one of the leaders in terms of earnings growth during this upcycle. The successful launch of the colossal RM6 billion EcoCity, an integrated mixed development located next to the Mid Valley City, over the next 12 months will be an additional major positive catalyst booster on the valuation and sentiment on the stock. SP Setia is our big cap sector top pick.

IGB Corp. (Buy; TP RM2.41) After the long delays, primarily due to the uncertain years of 2008/09, IGB may finally get a chance to launch its two long-awaited high-end condos projects in Jalan Stonor and on the last piece of land in the Mid Valley City by year 2011/12. Although the values are uncertain at this point, the latter’s project could be worth some RM600 million (based on the assumed average selling price of RM800psf on 750k sq ft of net saleable area).

Sunrise (Buy; TP RM4.62) Sunrise will be launching its C$400 million (RM1.2 billion) Canadian build-then-sell project and the RM679 million MK20 serviced apartments project by Sept/Oct 2010 and 1QCY11 respectively. On top of these, Sunrise is also looking to launch its RM508 million Solaris Tower (now called Menara Solaris) office towers, located behind the Renaissance Hotel, by Sept/Oct 2010. Further cementing its brightening prospects amid the improving real sector outlook, Sunrise has lined up a RM3.4 billion worth of development projects to be launched by FY12.

These include the RM1.6 billion Solaris 3 (an integrated commercial development similar to and near Solaris Dutamas), the RM483 million Bukit Jelutong integrated development (a 50:50 JV project with Sime Darby, with the GDV indicated here being Sunrise’s share), the RM736 million development of premium homes in Kajang (comprising villa terraces, semi-Ds and detached homes) and the RM619 million MK22
(serviced apartments in Mont’ Kiara).

For conservative reasons, these projects are not imputed into our earnings projection for now. Armed with these projects in hand, Sunrise may ride high on the broad sector recovery in the mid-to-high end residential segment. The development of mid-to-high end landed properties soon via its 58-acre landbank in Kajang (Klang Valley) worth RM736m could be an added kick for Sunrise in this upcycle.

YNH Property (Buy; TP RM3.03) By late 2010 or early 2011, YNH will be launching its RM875 million Kiara 163 (Mont’ Kiara) and RM533 million Fraser Residence (behind the Renaissance Hotel) serviced apartments. The successful launch of these projects will enable YNH to ride high on the broad sector recovery in the mid-to-high end residential segment, ensuring its strong earnings growth recovery by FY11 and onwards. Note that we continue to discount any earnings contribution from Menara YNH (although management says that it has sold off the project’s upcoming retail podium for RM300 million) as we are unsure when the construction activities of the tower will commence.

Bandar Raya (Buy; TP RM3.06) Although BRDB does hold a handful of prime upcoming projects, its hesitance to launch any of them between 2009 and mid-2010 was mainly due to its pessimism on the sector during the period. They viewed the timing of those launches in accordance to the property cycle as being more important to maximise shareholders’ value in the long run. The repercussion was, therefore, increasingly exhausted unbilled sales and therefore the expected sharp 30% fall in FY10 earnings. To replenish is rapidly depleting unbilled sales, BRDB launched its RM80 million Bandar Permas Jaya (Johor) semi-Ds and RM270 million CapSquare Condo 2 in July and August 2010 respectively. Both have so far achieved a take-up rate of 60% and 20% respectively.

BRDB is offering a 10/90 deferred payment and interest absorption scheme during the construction period for the latter project. Saving the best for last in order to ride high on the peak of the expected this upcycle, BRDB is waiting to launch its low-rise condos in Taman Duta worth RM750 million and the high-end condos in Bukit Bandaraya worth RM750 million in FY11. The successful launches of these properties amid the anticipated vast improvement in the real estate sector outlook will ensure that BRDB’s strong earnings growth will recommence in FY11 and onwards, after the blip in FY10.

Plenitude (Buy; TP RM4.84) Similar to its larger peer SP Setia, Plenitude has been thriving on brisk sales of its mid-to-high end landed properties throughout the country, in particular on the Penang island, Klang Valley, Johor and Kedah. Therefore, Plenitude will also very likely to be one of the leaders in terms of earnings growth during this upcycle. The successful launch of the residential developments on the 40.8 acres newly acquired land in Batu Ferringhi, Penang, could be an additional catalyst booster. The development will comprise high-end condos as well as mid-to-high end landed properties. GDV for the project is not finalised at this juncture but it could be more than RM400 million. Margin is expected to be high as the land was bought at a distressed price from a receiver.

Hunza Properties (Buy; TP RM2.88) After four quarters of sustainable and encouraging new property sales since mid-09 on the Penang island, it appears that the island’s property market is on a much firmer footing. In the most immediate future, Hunza could be looking to launch its RM300 million Alila II condominiums in Penang sometime in FY11. Over to sometime in FY12, Hunza has already had its RM300 million Segambut condominiums lined up for launching. However, pending further confirmation on the details of the launch, the Segambut project is not imputed into our earnings forecasts for now. We anticipate a further stronger earnings recovery and more buoyant sales of its projects in the next upcycle.

Glomac (Buy; TP RM1.82) The positive sentiment on the real estate sector would soon spill over to smallish property stocks such as Glomac as well. Glomac’s fortunes going forward will be well-sustained by its integrated commercial and township development projects. These include Phase 4 of Plaza Kelana Jaya (RM267 million), Mutiara Damansara (RM235 million) and the remaining components of Glomac Damansara (RM596 million). The developer continues to be primarily exposed to the development of mass-to-mid housing townships as well as in integrated commercial properties.

This article appeared in The Edge Financial Daily, September 7 2010.