Property Weekly Review: 8th – 14th December 2008

December 15, 2008 at 7:55 am Leave a comment

· Sunway City and SP Setia were the main gainers
Last week, Sunway City and SP Setia gained 9.7% and 8.7% respectively. Sunway City remains our top pick among property stocks under coverage given its undemanding valuation and resilient earnings stream from its property investment division. As for SP Setia, despite limited upside at current valuation, major shareholders with longer term horizon continued to accumulate the stock. Permodalan Nasional Bhd (including Skim Amanah Saham Bumiputra and other funds managed by it) has accumulated a 31% stake in SP Setia as compared to just 1% a year ago.
· Hillside projects facing objections
Following the recent landslide incidents, risk of hillside projects have been in the limelight and authorities have bowed to pressure from the public to review these projects. Selangor Dredging (SDR MK, not rated), United Malayan Land (UML MK, not rated) and MMC Corporation (MMC MK, not rated) are the affected ones so far following the Federal Territories Minister’s temporary freeze order on their hillside projects. The current knee-jerk reaction by the authorities is not something new which will result in project deferment and higher costs to ensure safety procedures are properly adhered to. However, it is the negative public opinion on hillside
developments which will hurt developers as demand for such projects may weaken going forward.
· More projects delay
Last week, Hunza Properties (HPB MK, not rated) and Eastern & Oriental (EAST MK, not rated) have reportedly deferred some of their launches in Penang in view of weak market conditions. With lower launches, developers are currently concentrating on selling existing unsold stocks as well as executing on-going projects to realise the huge unbilled sales locked-in prior to the economic downturn.
· Maintain NEUTRAL
As the economy heads toward a downturn, demand for durable goods such as property will take a hit. Property developers have reduced their launches significantly in view of weaker demand and this will affect forward earnings over next 2 years. During such times, we favour property stocks with property investment earnings such as Sunway City.

Share price performance

KLSE Property Index ended largely unchanged last week. However, Sunway City and SP Setia rose by 9.7% and 8.7% respectively. We continue to like Sunway City for its undemanding valuation and resilient earnings stream from its property investment division. Despite limited upside at current valuation, SP Setia has been on the rise of late partly due to accumulation by its major shareholders which have a longer term investment horizon. Last week, Skim Amanah Saham Bumiputra, Permodalan Nasional Bhd and Employees Provident Fund bought 4.22m, 1.12m and 0.02m shares respectively in SP Setia. It is interesting to note that Permodalan Nasional Bhd (including Skim Amanah Saham Bumiputra and other funds managed by it) has accumulated a 31% stake in SP Setia as compared to just 1% a year ago.
Meanwhile, Dato’ Dr Yu Kuan Chon mopped up another 0.17m shares in YNH Property while Lembaga Tabung Haji added another 0.05m shares. On share buy back, YNH Property continued to be active with 0.18m shares bought back from the market.

Hillside projects facing objections

Following the recent landslides in Bukit Antarabangsa as well as in Damansara, risk of hillside projects have been in the limelight and authorities have bowed to pressures from the public to review these projects. Last Friday, the Federal Territories Minister has reportedly ordered the Damansara 21 project, which is being developed by Selangor Dredging Bhd, to be halted. A 34-storey serviced apartment project in Bukit Ceylon jointly developed by United Malayan Land Bhd and MMC Corporation Bhd is another project to be affected by the freeze order. All hillside projects on Class IV slopes – with gradients above 35° – in Kuala Lumpur, Labuan and Putrajaya have been banned while those on Class II slopes – with gradients between 26° and 35° – have been temporarily frozen until a perfect planning, design and monitoring system is put in place and enforced by the government. Furthermore, the Public Accounts Committee (PAC) has proposed that the government introduce a new act on hillside development similar to that used in Hong Kong. Its chairman Datuk Seri Azmi Khalid said the act, based on Hong Kong’s Hillside Order, would compel house owners to conduct maintenance work and evaluate the slopes once every six months.
The current knee-jerk reaction by the authorities is not something new which will results in project deferment and higher costs to ensure safety procedures are properly adhered to.
However, it is the negative public opinion on hillside developments which will hurt developers as demand for such projects may weaken going forward.

More projects delay

Under current conditions, it is not surprising to hear developers deferring launches. Last week, news reports highlighted a few projects deferment in Penang. Hunza Properties Bhd deferred its RM400m Gurney Paragon Mall which was earlier scheduled to start last September while Eastern & Oriental will delay the launch of the first phase of the Seri Tanjung Pinang condominiums with gross development value of RM1bn. These condominiums were scheduled to be launched in the current financial year ending 31 March 2009 but have now been pushed to the third quarter of next year. With lower launches, developers are currently concentrating on selling existing unsold stocks as well as executing on-going projects to realise the huge unbilled sales locked-in
prior to the economic downturn.

Other notable property news

– Bandar Raya Development Bhd (BRD MK, not rated) is tipped to sign a deal with a Middle Eastern firm to sell a residential tower at its RM2bn CapSquare development in Kuala Lumpur. According to a source, the two parties are negotiating on the price but are expected to conclude a deal by the first quarter of next year. The pricing is expected to be between RM600 to RM700 per square feet.
– YTL Land & Development Bhd (YTLL MK, not rated) will launch Pantai Peak next year, which is the last phase of its Pantai Hillpark development in Kuala Lumpur. The RM500m project features a 16-ha gated community with 233 units of luxury 3-storey hillside semi-detached homes and bungalows. However, with the current negative public opinion of hillside projects, the prospect of this project may be in doubt in the near term.

Comments:
SP Setia achieved record revenue of RM1.3bn for FY2008 but core net profit declined by 28.3% y-o-y to RM186.6m due to higher building materials prices, delay in construction progress and timing mismatch of operating costs for new projects. FY2009 will remain a challenging year and SP Setia will focus on mass housing products for middle income segment where demand fundamentals are still strong and less speculative.

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