Posted on 4 April 2014 - 05:40am
PETALING JAYA: RHB Research has upgraded the property sector to "overweight" from "neutral" underpinned by undemanding sector valuations, catalysts from upcoming infrastructure projects, a stronger 2014 GDP growth outlook, and a negative real interest rate environment.
Its analyst Loong Kok Wen believes that the sector's valuations have largely priced in the negative impact of the Government's cooling measures announced in Budget 2014.
It pointed out that the property sector is now trading at a 33% discount to Revalued Net Asset Value (RNAV), which is slightly higher than the pre-election level, and much lower than the recent peak of 13%.
It also advised investors to take up positions in larger-cap property stocks which are now trading at attractive valuations compared to small caps stocks which have appreciated by 59% compared to the larger cap stock's 26%.
He instead recommended that investors switch to larger-cap property stocks, as they are a better proxy to the property sector, especially with market demand expected to recover.
"Going into the second quarter, we advise investors to position for the larger-cap property stocks, as these developers are typically those with much stronger balance sheets, more strategic landbank portfolios, stronger brand names, and better management and execution track records," he said. His top picks were IJM Land Bhd and Sunway Bhd.
Loong also noted that the high-speed rail (HSR), MRT lines 2 and 3, and Kwasa Damansara projects development in Sungai Buloh will be the additional re-rating catalysts for the sector, especially within the Klang Valley.
He believes the spillover from both the HSR and MRT projects to the property market will be the greatest in the Klang Valley, while sentiment in the Iskandar Malaysia market will also likely recover.
"We expect the news flow from both projects to stream in from mid- 2014," he said
He said Penang's growth will still be primarily driven by the flow of investments into Batu Kawan while Iskandar Malaysia, although demand in the physical market will take longer to recover, there is market speculation that a new casino may be built in Johor.
"If this materialises, it could give rise to spillover effects on that region's property sector," he said.
Loong believes that Malaysia property sector will recover in the second half of 2014 (2H14) driven by a stronger 2014 gross domestic product (GDP) growth outlook and the implementation of the goods and services tax (GST) in April 2015.
He said that the implementation of the GST from April 1, 2015 is expected to spur demand for big-ticket items, such as white goods and properties, as consumers rush to make purchases to avoid paying the tax.
"In anticipation of a price increase of at least 6% next year due to this tax, and the likelihood of the incremental cost being passed on by developers, we believe demand for properties will increase in 2H14," said.
In conclusion, Loong urged investors to watch out for UEM Sunrise Bhd and Eastern & Oriental Bhd.
"The former will be one of the prime beneficiaries when the HSR or casino projects are announced, while the latter is expected to obtain approval for its Seri Tanjung Pinang 2 project in mid-2014. We also view E&O as a potential takeover target," he said.