Property stocks regain lustre

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KUALA LUMPUR: After underperforming the broader market for a long time, property stocks have regained investor interest and saw a good run recently, as investors were swayed by cheap valuations, corporate developments, and a positive outlook on the sector.

Last Friday, lower-liner property stocks dominated trading on the local bourse. Karambunai Corp Bhd, Talam Corp Bhd and Malton Bhd were the three most heavily traded counters, with a total of 146.8 million shares traded for the three stocks.

Other active property counters last Friday included Asian Pac Holdings Bhd, Land & General Bhd, UEM Land Holdings Bhd and Tebrau Teguh Bhd.

According to an analyst, the recent rally could be fuelled by the property sector’s positive outlook following the announcement of various projects under the Economic Transformation Programme (ETP), as well as the entry of foreign funds.

“Property stocks have always been laggards. But there has been renewed interest with possible projects under the ETP. We have an overweight outlook on the sector in the long-term, with more jobs in the pipeline — especially those pertaining to government land and Greater Kuala Lumpur,” she told The Edge Financial Daily.

The analyst also noted that the recent sector rally could be attributed to news of the Abu Dhabi sovereign wealth fund’s plans to build the RM26 billion Kuala Lumpur International Financial District in Jalan Tun Razak.  

Indeed, positive news flow on new property investments by foreign sovereign wealth funds may be encouraging foreign portfolio investors as well. “Foreign funds coming into the industry could be another factor that has pushed these property stocks up,” the analyst said.

Last Friday, Prime Minister Datuk Seri Najib Razak announced the tie-up between Abu Dhabi’s Mubadala Development and 1Malaysia Development Bhd (1MDB) to develop the project in Jalan Tun Razak. Mubadala had also agreed to invest RM21.7 billion in long-term projects in the Sarawak Corridor of Renewable Energy (Score).

The entry of Abu Dhabi’s sovereign wealth fund follows that of other Mideast funds. Recently, Qatar Investment Authority teamed up with the 1MDB to redevelop the Royal Malaysian Air Force (RMAF) base in Sungei Besi.

The sovereign wealth funds of Malaysia and Singapore — Khazanah Nasional Bhd and Temasek Holdings — are also teaming up to jointly develop six parcels of land in Singapore as part of the agreement for the relocation of train services from the Tanjong Pagar railway station to the Woodlands checkpoint.

Property stock rally overdue?The recent rally in property stocks is a welcome respite for investors seeking new leads, market observers said.

For a long time, property stocks have underperformed the broader market, despite decent earnings and a strong rally in property prices over the past year.

“Property companies are reporting solid revenues, margins and profits. There is no reason for these not to be reflected in their share prices,” another analyst noted, adding that the property market was doing well and yet most property stocks were trading well below their historical book value, and on single-digit earnings multiples.

Much of investors’ earlier reservations centred around the introduction of the accounting standards IFRIC 15: Agreements for the Construction of Real Estate, which calls for a delay in revenue recognition until the construction completion date.

The other concern was the possibility of further moves to curb property speculation, such as through the real property gains tax (RPGT) or other mechanisms. The RPGT was reintroduced in last year’s budget, but was later relaxed and the tax fixed at 5% for properties sold within five years.

The analyst noted that investor sentiment had improved following the postponement of the adoption of the new IFRIC 15 accounting standards from July 2010 to January 2012.

“Although the IFRIC 15 would result in lumpy reported earnings, shareholders should not worry as companies  would  see positive cash flow in their statements. Also, companies are prepared to educate shareholders by providing two statements,” she noted.

As to the possibility of a hike in the RPGT, the analyst said there were no concerns as the government would want to promote the sector following the implementation of the ETP.

“I think the government would not raise the RPGT as it would dampen the market. This would be counterproductive to its efforts to promote the sector. In addition, I believe that our property market is driven more by actual occupants than speculators,” she said.

Corporate developments fuel interestApart from the upbeat outlook on the property sector, industry observers have also noted that prices could have risen on rumours or corporate developments.

“Some of the stocks may have seen price movements fuelled by speculation,” one of them said. He cited IJM Land Bhd, Karambunai Corp Bhd and Malton Bhd as recent examples.

IJM Land closed at its six-month high of RM2.62 last Friday, with 4.68 million shares done.

Last week, market talk had it that IJM Land was ripe for a privatisation by its parent IJM Corp Bhd. “We think the most possible reason for IJM Land to be taken private is the potential addition of IJM Corp to the benchmark index, the FBM KLCI top 30 stocks, following the inclusion of Gamuda Bhd,” said a report by RHB Research.

It said such a move would lead to a re-rating, and increase IJM Corp’s market capitalisation to RM8.2 billion from RM7.1 billion.

Industry observers also noted that it would make sense for IJM Corp to park its construction and property segments under one umbrella, as the property sector could buffer the group from any downturn in the construction sector.

On the other hand, the relatively quiet Karambunai saw a spike in its share price when rumours spread of a possible integrated resort development in Karambunai, Sabah, which may include a casino.

The counter rose more than 200% to 18 sen from 5.5 sen, before the loss-making company quashed the rumours. Last Friday, Karambunai was the most active stock with 77 million shares done. It has risen 78.57% year-to-date, closing at 12.5 sen.

Malton has seen its share price gain 71.5% from its lowest of 35 sen on Feb 18, to close at 60 sen last Friday. The low-key company is trading at a low forward price-to-earnings ratio (PER) of under six times, according to local research houses, and at half its latest net assets per share of RM1.26. Malton is reportedly planning to launch niche projects in the next two years with a gross development value of RM1.6 billion.

Valuations aside, what could also be drawing investors to the stock is the corporate actions of its major shareholder Datuk Desmond Lim Siew Choon.

Lim recently paid RM209.9 million, or a record RM7,209.80 per square foot, for a tract of land next to Pavilion KL and is also said to have 40% interest in the consortium earmarked to develop the 162ha RMAF site in Sungei Besi.

Meanwhile, UEM Land Bhd has also been rallying, rising 61% in the last six months to RM2.41. The company is riding on the prospects of the Iskandar township in Johor. As the property arm of Khazanah Nasional, via UEM Group, it is also seen as a beneficiary of the redevelopment of six parcels of land in Singapore that will be jointly developed by Singapore and Malaysia.

This article appeared in The Edge Financial Daily, October 11, 2010.