KUALA LUMPUR: Local property players, especially government-linked companies, are expected to go for mergers and acquisitions (M&As) amid the sector’s lower valuation.
Market observers noted that Bursa Malaysia’s Kuala Lumpur Property Index had fallen 17 per cent year-to-date and that sectoral stocks were trading below their book values.
Kenanga Research said although their valuations appeared compelling, there was no clear catalyst in sight with issues weighing down the sector.
The firm added that the stocks were approaching historical peak level of 68.7 per cent, which is below their book values.
“Earnings quality has deteriorated given several downward earnings revisions over the last few quarters, mainly driven by margin compression issues arising from inventory clearing efforts,” it said.
Kenanga Research said developers’ return on equities (ROEs) had continued to weaken. This was more severe than the ROE trends of supporting sectors namely construction and financials.
“We see no near-term catalysts and expect most developers’ share prices to range-bound at current levels pending the 2019 Budget announcement on November 2, or if there are earlier announcements on housing policies or lending requirements,” it said.
While small-mid cap players were trading at very low price-by-volume, Kenanga Research said companies were less likely to undertake any privatisation exercise in order to retain their listing status for their branding and positioning in the market.
“Privatisations are likely if there are other listed mother/sister companies while M&As tends to be strategic, likely involving government-linked companies.”
The firm said the government had recently launched the National Housing Policy 2.0 to balance between affordable housing needs and current oversupply situation from a primary and secondary market perspective.
“We are curious how first-home-buyers’ hurdles with financing will be addressed considering the banking system’s current high exposure to real-estate.
“The landscape for developers will also remain challenging as we foresee less new launches since focus will be on inventory clearing, which means thinner margins, not to mention the pressure from the government to lower house prices due to Sales and Services Tax (SST) exemptions and perhaps a more active secondary market.”
The SST exemption on key building materials would result up to five per cent reduction in prices, as opposed between six per cent and 10 per cent reduction, expected by the government.
“We expect more margin compressions if developers are forced to drop house prices up to 10 per cent. While this may help the ‘affordable ratio’ for first-time home buyers, it begs the question if the reduction in house prices will have implications on the secondary market.”
Kenanga Research maintained a “neutral” call on developers due to the anticipation of lack of strong earnings or sales catalysts that would help ROE recovers.
It said the property sector was awaiting the new national affordable housing policies, which will be good for the “rakyat” but it also may create more competitions in the market, which may result in thinner margins.
“Pending the new national affordable housing policy, SST issues and Budget 2019 announcement, we believe the sector will be in ‘limbo’ as there are no clear catalysts while new policies could change the landscape for developers,” it added.