Property counters undervalued on lower sales

2020-07-29

A DROP in property transactions this year due to the Covid-19 pandemic continues to undervalue property counters on the FTSE Bursa Malaysia KLCI as these stocks are trading historically below their market value/price-to-book (P/B) ratio, observed analyst.

The short-term National Economic Recovery Plan (Penjana), which includes various incentives to spur the growth of the property market, has failed to reflect on major property developer stocks as most of the developers are trading at undemanding valuations with the recent drop in share prices, said MIDF Amanah Investment Bank Bhd (MIDF Research) analyst Jessica Low.

“Notably, SP Setia Bhd, IOI Properties Group Bhd and UEM Sunrise Bhd are trading below -2 standard deviation (SD) of its five-year mean P/B, while Eco World Development Group Bhd (EcoWorld), Mah Sing Group Bhd, UOA Development Bhd and Eastern & Oriental Bhd (E&O) are trading below -1 SD of its five-year mean P/B.

“Hence, we think the property counters are undervalued and should trade at a higher valuation considering the sector outlook is improving gradually,” she said in a report yesterday.

MIDF Research raises its target price (TP) for property counters under its coverage as it narrows its revalued net asset value discount for property companies slightly amid its expectation of gradual recovery for the property sector in the second half of 2020 (2H20).

The TP for SP Setia is raised to RM1.42 from RM1.33. The company closed at one sen or 0.64% lower to 78 sen yesterday, giving it a RM3.14 billion market capitalisation.

SP Setia has recently lowered its sales target for the year to RM3.8 billion from RM4.55 billion previously, while the group’s unbilled sales stood at RM9.8 billion as of May.

MIDF Research has also revised the TP for Mah Sing higher to 82 sen from 70 sen.

The counter closed three sen or 3.65% higher to 71 sen, giving it a RM1.72 billion market capitalisation.

Mah Sing’s sales target for 2020 is RM1.6 billion, with RM1.56 billion unbilled sales as at March.

The TP for UEM Sunrise is adjusted higher to 58 sen from 54 sen previously.

The developer’s share price remained unchanged at 43 sen yesterday, with a RM1.93 billion market capitalisation.

Earlier this year, UEM Sunrise announced a sales target of RM2 billion.

However, it recently said it is reviewing the target, after posting a RM21.94 million net loss in the first quarter of 2020 (1Q20). UEM Sunrise’s unbilled sales stood at RM1.8 billion as of March.

The TP for IOI Properties Group is raised to RM1.29 from RM1.21, while TP for UOA Development has been increased to RM2.12 from RM2.06.

The TP for EcoWorld is revised up to 68 sen from 61 sen and TP for Sunway Bhd to RM1.61 from RM1.59 based on sum-of-parts valuation. Lastly, the TP for E&O is also raised to 44 sen from 42 sen previously.

MIDF Research has upgraded the property sector to ‘Positive’ from ‘Neutral’.

“While we reckon the upcoming 2Q20 earnings by developers will be dismal due to business disruption from the Movement Control Order, we think the negatives have been largely priced in, considering the Kuala Lumpur (KL) Property Index has declined by 23.6% year-to-date.

“We opine investors should look forward to earnings and new property sales recovery in 2H20 which will be underpinned by the Penjana incentives and record-low interest rate,” Low said.

She added that lower property inventory has also eased the concern of property overhang in the country.

MIDF Research’s top picks are SP Setia and Mah Sing as their products are more towards affordable to mid-range properties which cater for demand of owner-occupiers.

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