Action: Bank Negara hiked rates by 25bps on 5 May;a 50bp hike in 2011F is likely to up mortgage payments 4-7%, in our view
Following Bank Negara’s 25bp rate hike to 3%, our Malaysia banks analyst Julian Chua expects banks to raise the base lending rate (BLR) by 25- 30bps. Our sensitivity analysis shows that mortgage payments could rise 4-7% for a 50bp hike in 2011F, which in our view, may impact sentiment more than actual mortgage payments. While we remain confident that Malaysia’s young demographic makeup is likely to ensure a constant demand for properties, we believe affordability is likely to come into focus over the next few months.
Catalyst: Watch for new sales launches, debates on housing affordability
Our 27 April sector update highlighted a list of upcoming launches that were skewed towards properties worth RM1mn and above. Newly released 1Q11 average prices recently showed continued sequential appreciation in condo prices in the Klang Valley, and semi-detached and detached houses in Selangor.
Recap of our sector call: Staying selective as bigger name valuations close to peaks; top pick Mah Sing
In general, Malaysian property stocks have outperformed the KLCI by 5% ytd. The best performer in our coverage has been Mah Sing (+37.5% ytd outperformance) and the worst has been SP Setia (+3.7% ytd outperformance). Our top pick remains Mah Sing; the company recently revised its GDV guidance upwards for existing projects (mainly Southbay City and Icon City), resulting in remaining GDV + unbilled sales as of now (prior to the results release at end-May) to move from c.RM12bn to RM14.1bn.
Overall view of 50bp hike for 2011 = 4-7% impact on mortgage payments
Based on pre-hike financing rates of 4% on average (BLR – 2.3%), monthly mortgage payments are likely to rise by 4-7% for a further 50bp increase in the OPR (as per our inhouse forecasts – the first 25bp hike occurred on May 5; we expect another 25bp hike in 3Q11).
Our Malaysia banks analyst Julian Chua however also believes that what remains to be seen is whether banks will try to pass through additional costs arising from the 100bp increase in the SRR to consumers. At a property launch last weekend, we noticed banks offering BLR minus 2.4-2.45% with reduced lock-in periods of three years (from BLR minus 2.3% and five-year lock-in periods a few months back), implying greater competition among banks for the consumer loans business.
Exhibits 1 and 2 provide a sensitivity chart and table of mortgage payments to lending rate hikes. As such, even if the actual impact of the recent OPR hike may only cause a minor impact on mortgage payments, overall sentiment or the inclination to upgrade homes may be affected.
Industry sources (namely, the Malaysian Real Estate and Housing Developers Association (REHDA) generally expect double-digit price appreciation (c. 13%) in residential properties for 2011, and while we continue to expect transaction volumes and values this year to be supported by a strong secondary market and mass market transactions (just like it was last year) due to a young underlying Malaysian demographic profile, we believe the key focus in the sector over the coming months will likely be affordability for the larger part of the middle-income Malaysian population (and incidentally, a key voter pool in urban areas).
While there will always be a cash-rich older generation to help its young buy homes, we believe that a stronger upside to support a structural long-term residential property boom is continued affordability levels, when every working person is able to afford a house. For more details on our affordability analyses, please see our 8 April 2011 report, “Mass Market or Million Dollars, Dear?” at www.nomura.com/research/getpub.aspx?pid=428887
Our analysis of upcoming launches points to a higher number of launches priced over RM1mn (as detailed in our 27 April sector update here at www.nomura.com/research/getpub.aspx?pid=432869).
Next 6 months in Malaysia property – trying to look ahead
We continue to expect that property transactions will likely remain supported into 2011 on the back of continued favourable demographics which have driven up the volume of secondary mass market transactions.
Analysing the correlation of residential sales and GDP growth, we find that GDP growth tends to lead residential property values at the major economic turns by about 1-2 quarters. 1Q and 2Q numbers tend to be weaker with transactions picking up throughout the year.
As such, unless the market sees strong and surprising sales numbers even in 1Q and 2Q breaking away from seasonal trends, we think the current premium valuations for names like SP Setia have priced in most good news. Recent anecdotal evidence suggests better performance for mass market launches (while most developers are positioned in mid- to high end), while the official Property Market Report 2010 released by the Valuation and Property two weeks ago highlighted a moderation in overall primary sales performance y-y (47% in 2010 from 59% in 2009).
Meanwhile, recently released 1Q11 average prices (by Valuation and Property Services Department) showed prices continued to climb for condos in Klang Valley, and certain landed properties. The high-end landed properties in KL (between RM1-2mn) saw a slight slowdown in price performance.
Recapping our sector call – stay selective
We continue to recommend staying selective and focusing on names with re-rating stories as news of sales launches, and good profit performance have been baked into valuations of leading names like SP Setia (NEUTRAL). Our top pick remains Mah Sing given its lower P/Es, supported by above-average ROEs and the high dividend yields. It recently revised its RNAV guidance for a few projects post its annual review of projects, the main ones being Southbay City (from RM911mn to RM2,091mn), Icon City (upwards by about RM200mn) and Kinrara Residence (upwards by about RM136m) largely due to higher pricing from project GDVs that have not been revised for more than a year.
Valuation Methodology and Risks
Mah Sing
Valuation Methodology - We peg Mah Sing’s price target at RM3.08, at parity to our RNAV-based and diluted fair value (after accounting for the proposed convertibles) derived from net present value of profits from on-going and future projects at a discount rate of 9%.
Investment Risks: 1) Project delays. Any project delays or disappointing take-up rates could dent our earnings forecasts. Profit margin could also vary at different stages of billing — a slower actual schedule might result in a difference between actual reported net profit and our estimates. Project delays could arise from longer-than-expected approval/completion on land acquisition and building designs. Delays to key projects such as Icon City, Garden Plaza or Southbay could affect our projections to a greater degree compared to the rest of its projects. 2) General economic conditions. The company’s operational as well as stock performance is closely tied to general economic conditions and consumer sentiment. Any contractions in GDP growth or unexpected government policy measures to curb sentiment in the property sector are downside risks to our call.
SP Setia
Valuation Methodology - We peg SPSB’s price target at RM4.67, at parity to our RNAV-based and diluted fair value (after accounting for any warrants conversion), derived from a combination of a net present value of profits from ongoing projects at a discount rate of 9% and revaluation surplus of land values above their book value.
Investment Risks: 1) Any project delays or disappointing take-up rates could dent our earnings forecasts. Profit margin could also vary at different stages of billing – a slower actual schedule might result in a difference between actual reported net profit and our estimates. Project delays could arise from longer-than-expected approval/completion on land acquisition and building designs. 2) Project concentration in Johor / Klang Valley - While the company has stepped up its diversification efforts in recent years by securing projects in Vietnam and China, the bulk of its portfolio still consists of projects in Malaysia, and in particular, residential projects in Johor and Klang Valley. Its operational as well as stock performance is therefore closely tied to the Johor and Klang Valley residential markets. 3) Double dip or recessionary scenario occurring moving forward. Upside risks include further RNAV-enhancing landbanking acquisitions and higher than expected sales and take-up rates.
Malaysian Resources
Valuation Methodology – We peg MRCB’s price target at RM2.42, at parity to our RNAV-based fair value, derived from 1) the net present value of profits from its property segment at 10% discount rate, 2) valuing the construction profits at 15x PE FY12F (FY12F earnings of RM45.4mn) based on the multiples used for other construction stocks in our rating universe, 3) valuing the two toll concessions using a 10% discount rate.
Investment Risks: Downside risks exist should: 1) project billings be delayed; 2) land bank / order book replenishment remain weak; or 3) slowdown in the economy, double dip or recessionary scenario moving forward. Upside risks include faster-than-expected order book wins and faster progress billing pace.
UEM Land
Valuation Methodology – We peg ULHB’s price target at RM3.29, at parity to our RNAV-based fair value, derived from a combination of a net present value of profits from on-going projects at a discount rate of 10% and revaluation surplus of its landbank above its book value.
Investment Risks: Downside risks to our call include developments that could jeopardise progress in developing Nusajaya, which comprises 99% of the landbank: 1) advent of a recession could derail the development in Nusajaya; 2) negative newsflow on land sales / deal progress; 3) any reversal in the positive tone and progress in Malaysia- Singapore relations as negotiations continue; 4) political events, eg, election upsets that could encroach on UEM Land’s position as a strategic Khazanah holding and change the regulatory environment; 5) delayed launches / project delays which could lead to earnings downside as Nusajaya is less concentrated than the markets of Selangor and KL; 6) immediate conversion of the RCPS which could present near-term dilution; and 7) any restrictive moves to curb the Malaysian property market.
Appendix A-1
Analyst Certification
I, Jacinda Ee Wenn Loh, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Valuation Methodology We peg Mah Sing’s price target at RM3.08 at parity to our RNAV-based and diluted fair value (after accounting for the proposed convertibles) derived from net present value of profits from on-going and future projects at a discount rate of 9%.
Risks that may impede the achievement of the target price 1) Project delays. Any project delays or disappointing take-up rates could dent our earnings forecasts. Profit margin could also vary at different stages of billing — a slower actual schedule might result in a difference between actual reported net profit and our estimates. Project delays could arise from longer-thanexpected approval/completion on land acquisition and building designs. Delays to key projects such as Icon City, Garden Plaza or Southbay could affect our projections to a greater degree compared to the rest of its projects. 2)General economic conditions. The company’s operational as well as stock performance is closely tied to general economic conditions and consumer sentiment. Any contractions in GDP growth or unexpected government policy measures to curb sentiment in the property sector aredownside risks to our call.
Valuation Methodology We peg SPSB’s price target at RM4.67 at parity to our RNAV-based and diluted fair value (after accounting for any warrants conversion), derived from a combination of a net present value of profits from ongoing projects at a discount rate of 9% and revaluation surplus of land values above their book value.
Risks that may impede the achievement of the target price 1) Any project delays or disappointing take-up rates could dent our earnings forecasts. Profit margin could also vary at different stages of billing – a slower actual schedule might result in a difference between actual reported net profit and our estimates. Project delays could arise from longer-than-expected approval/completion on land acquisition and building designs. 2)Project concentration in Johor / Klang Valley - While the company has stepped up its diversification efforts in recent years by securing projects in Vietnam and China, the bulk of its portfolio still consists of projects in Malaysia, and in particular, residential projects in Johor and Klang Valley. Its operational as well as stock performance is therefore closely tied to the Johor and Klang Valley residential markets. 3)Double dip or recessionary scenario occurring moving forward. Upside risks include further RNAV-enhancing landbanking acquisitions and higher than expected sales and takeup rates.
Valuation Methodology We peg MRCB’s price target at RM2.42 at parity to our RNAV-based fair value, derived from 1) The net present value of profits from its property segment at 10% discount rate 2) Valuing the construction profits at 15x PE FY12F (FY12F earnings of RM45.4 mn) based on the multiples used for other construction stocks in our rating universe 3) Valuing the two toll concessions using a 10% discount rate.
Risks that may impede the achievement of the target price Downside risks exist should: 1) project billings be delayed;2)land bank / order book replenishment remain weak; or 3) slowdown in the economy, double dip or recessionary scenario moving forward. Upside risks include faster-than-expected order book wins and faster progress billing pace.
Valuation Methodology We peg ULHB’s price target at RM3.29 at parity to our RNAV-based fair value, derived from a combination of a net present value of profits from on-going projects at a discount rate of 10% and revaluation surplus of its landbank above its book value.
Risks that may impede the achievement of the target price Downside risks to our call include developments that could jeopardise progress in developing Nusajaya, which comprises 99% of the landbank: 1) advent of a recession could derail the development in Nusajaya; 2) negative newsflow on land sales/dealprogress; 3)any reversal in the positive tone and progress in Malaysia-Singapore relations as negotiations continue; 4) political events, eg, election upsets that could encroach on UEM Land’s position as a strategic Khazanah holding and change the regulatory environment;5)delayed launches/project delays which could lead to earnings downside as Nusajaya is less concentrated than the markets of Selangor and KL;6)immediate
conversion of the RCPS which could present near-term dilution; and 7)any restrictive moves to curb the Malaysian property
market.
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