KUALA LUMPUR: It has been more than three years since the puncture of the property boom. Developers’ share prices have fallen substantially. Still, they are not as attractive as before.

A random check on Bloomberg data shows that most of the 32 property companies with a market capitalisation of over RM500 million are trading at prices below their tangible book value currently, at a sector average of 0.95 times.

However, at current levels, these companies are trading at an average price-earnings ratio (PER) of 22.10 times, compared with their five-year average of 16.88 times. This shows that developers’ earnings growth has yet to catch up with their share price.

RHB Research analyst Loong Kok Wen told The Edge Financial Daily that after all these years, the overall property market still has further downside looming, and it may not be a short wait for the downtrend to reverse.

“It is too early to bottom-fish; we’ve still got a few concerns ahead and I think it will take, conservatively, another year or two to see a meaningful recovery for property developers in terms of demand,” she said.

Loong said traders waiting for a post-election pickup in property stocks may be disappointed as it is expected to be merely a short-lived rally.

“During the previous election, property stocks had traded range-bound for a year. This time around, I think it will be the same, except that interest rates are also anticipated to rise,” she added.

Loong expressed concerns over property players offering products at the high-end segment, adding that affordability may damp buyers’ appetite especially in a rising interest rate environment.

Eastern & Oriental Bhd is one of them, which prides itself as a premier lifestyle property developer. The group is most notable for its historic luxury E&O Hotel in Penang that was established in 1885.

According to media reports, the developer is targeting a rather flattish property sales of RM350 million to RM380 million for its financial year ending March 31, 2018 (FY18), and a focus on selling down its inventory.

Over the past three years, E&O’s share price has fallen 28.4%. Its price-to-book value too has dropped to 1.06 times, from a five-year average of 1.41 times.

At current levels, it is trading at a PER of 16.47 times, a discount compared to the five-year average of 27.07 times, making it a rather attractive stock to consider among the rest.

“Even though E&O has very cheap valuations now, it is difficult to justify given the risks as they are selling higher-end products,” said Loong.

Furthermore, should the US Federal Reserve hike interest rates more than three times, Malaysia could potentially take it as a cue for a more aggressive approach, affecting mortgages and affordability of purchasers, and therefore eating into earnings of property players, she added.

Analysts also worry that the oversupply in certain segments of the property market may not be supportive to a strong recovery.

“Although many developers have slowed down their launches, there are still a lot of unsold inventories in the market. I would say it is not an alarming level, but it is not supporting a recovery soon,” said Loong.

Lee Meng Horng of Hong Leong Investment Bank, however, is relatively positive about the market, although he too expects property stocks will not perform in the short term.

He said the oversupply issue is not a sector-wide blanket but a mismatch in supply and demand, and there may still be some bargains out there for investors to hand-pick.

“It is not all doom and gloom. On a year-on-year basis, we don’t see anymore sales decline from the year 2016, although there may be some downward pressure on earnings, as launches were held back for a more timely and less aggressive approach. Nonetheless, the downward pressure on earnings is not something new,” he said.

MIDF Amanah research analyst Jessica Low concurred, saying the recent selldown in Mah Sing Group Bhd suggests an attractive dividend yield of 6.3%.

“Fundamentals of the company (Mah Sing) remain strong, with stable new sales outlook intact. The attractive dividend yield could be an indication that the downside should be limited in the near term as the dividend yield could support the share price,” Low said.

Low has a “buy” call on Mah Sing with a target price of RM1.68 in view of the company’s strategy of launching mass-market residential projects in strategic locations, while UOA Development Bhd has a target price of RM2.84, given its attractive dividend yield of 6.2% and a healthy balance sheet.

UOA Development has a net gearing of 0.03 times, and a cash ratio of 0.68 times.

Bloomberg data shows all 32 property companies recorded a net gearing of not more than one time, but only six registered a cash ratio of above one. Cash ratio is a gauge of companies’ ability to cover their short-term liabilities.

Among them are Selangor Properties Bhd, Plenitude Bhd, Land & General Bhd, SHL Consolidated Bhd, and KSL Holdings Bhd.

Guocoland Malaysia Bhd and Sunway Bhd have the highest gearing level among the companies at 0.98 and 0.97 times, respectively.

Source: TheEdgeMarkets