Tuesday June 14, 2011

Property at ‘upper band’

By Jagdev Singh Sidhu
jagdev@thestar.com.my

Local property stocks trading at higher valuations against regional peers

KUALA LUMPUR: Property companies on Bursa Malaysia, which have lagged behind the performance of the broader market in the past month, are trading at valuations that put such counters at the upper band against its regional peers.

Some analysts admit the valuations of the larger property companies are frothy but say there are reasons why such stocks are seeing such valuation differences from property companies in Singapore, Hong Kong or Indonesia.

“They have a premium because of execution, a track record and branding,” said HwangDBS Vickers Research analyst Yee Mei Hui, when comparing SP Setia Bhd, the country's top property company, with companies from other countries.

The regional comparison, which was made by CIMB after SP Setia released its second quarter results, showed the biggest property companies on Bursa Malaysia are generally trading at a slim discount to their share price as compared with the regional peers on a revalued net asset value (RNAV) basis.

The RNAV is what analysts think the market value of land and assets on a company's books amounted to compared with the book value of such land.

The small discount is more pronounced for the country's largest property counter by market-capitalisation terms - UEM Land Holdings Bhd, which has a market capitalisation of US$3.8bil - as the counter is trading at about a 9% discount to the stock's RNAV. SP Setia was trading at about 2% as of last week.

In comparison, the larger property companies, such as CapitaLand in Singapore and China Overseas Land & Investments Ltd, are trading at a much steeper discount to their RNAV.

One analyst thinks the difference in pricing compared with Singapore and Hong Kong is down to the mechanics of the markets there.

“Property prices there are volatile and investors who buy such stocks can overshoot in either way,” said ECM Libra Investment Bank Bhdresearch head Bernard Ching.

He said the land value in Malaysia was not as volatile and tended to rise on a gradual basis.

Concerns over a property bubble in Hong Kong and Singapore has also led to investors taking a much more cautious view of the value of property stocks in those countries in relation to their RNAV.

Some analysts feel the reason why Malaysian property counters have a higher valuation than regional companies was also down to a few factors.

Concentration of Malaysia-based funds seeking investments in Malaysia has seen a lot of money chasing a few quality companies and the bigger the stock, the better their following is.

“Property development is a medium term business and it's not solely about land value,” explained an analyst. He said investors generally want to look at stocks that generate a return on the value of the land the companies own and explained that companies that generally sit on large land reserves with little activity often see bigger discounts to their RNAV.

That argument has been used to explain Mah Sing Group Bhd's share price that is trading close to the company's estimated RNAV.

“Mah Sing works on a fast turnaround model and does not have a lot of landbank,” said an analyst.

Although property stock valuations were high, analysts said the divergence of the property index and that of the FTSE Bursa Malaysia KLCI (FBM KLCI) was down to investors chasing after the more liquid blue chip counters.

“The property index has a big number of mid and small cap stocks,” said an analyst.

“When the market turns south, buying will concentrate on the large, blue chip stocks.”

Property companies on Bursa Malaysia still, on average, attract “buy” calls with analysts saying the prospects of choice developers are still bright.