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Property sector
Downgrade to “neutral” from “overweight”:
The property sector was one of the better performing sectors in 2014 but that will be difficult to sustain in 2015 in view of the imminent implementation of the 6% goods and services tax (GST) starting April 1. This year is going to be another tough year for developers in terms of sales, and investors should be selective in their exposure to property stocks.

We downgrade the property sector from “overweight” to “neutral” while downgrading UEM Sunrise Bhd from “buy” to “hold” and S P Setia Bhd from “hold” to “reduce”.Our top picks remain the top two best-managed companies in the sector, Mah Sing Group Bhd and Eco World Development Group Bhd. They have the best chances of bucking the softer sales trend.

The property sector eased 0.6% in 2014, outperforming the Kuala Lumpur Composite Index’s steeper 5.7% fall. For most of the year, the best performing property stocks were largely smaller-cap names. The only relatively large-cap developer that performed strongly for most of last year was E&O Property Development Bhd on the back of the final approval for its massive reclamation project as well as the management’s acquisition of a block of shares from Sime Darby Bhd at a large premium.

Developers faced a slow first half of 2014 (1H14) on the back of the 2014 Budget measures to curb speculation announced in October 2013. 

But property sales started to pick up in 2H14 on the back of renewed confidence and expectations that property prices will rise after GST is implemented. We believe this pickup in buying momentum will continue in the first quarter of 2015 (1Q15), but buyers will likely adopt a wait-and-see attitude for six to nine months after that, which would be in line with the typical consumer behaviour experienced in most countries that implemented GST. 

The net effect is that 2015 could end up being a similar year to 2014 in terms of property transactions, which we would categorise as a lacklustre year.

In 2014, only Mah Sing and Eco World appear to have bucked the weak sales suffered by most developers. We believe Mah Sing should manage to exceed its 2014 new sales by 10% to 15% while Eco World exceeded its RM2 billion sales target by a massive 60%. But with another tough year ahead in 2015, we widen the discount to revalued net asset value for most developers by up to 20% as weaker sales will translate into slower earnings growth. — CIMB Investment Bank, Jan 5.

Property-sector_06Jan15_theedgemarket

This article first appeared in The Edge Financial Daily, on January 6, 2015.

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