Property Developers 2016 Outlook - DBS Research 2015-12-17: Time for a relook

Property Developers 2016 Outlook - DBS Research 2015-12-17: Time for a relook CITY DEVELOPMENTS LIMITED C09.SI  FRASERS CENTREPOINT LIMITED TQ5.SI  PERENNIAL REAL ESTATE HLDGSLTD 40S.SI  CAPITALAND LIMITED C31.SI  UOL GROUP LIMITED U14.SI  CITY DEVELOPMENTS LIMITED C09.SI 

Property Developers 2016 Outlook - Time for a relook 

  • Trading near multi-year lows, implying attractive risk/reward ratios 
  • SG developers have substantially de-risked residential portfolio and diversified earnings base 
  • Pick diversified plays like CapitaLand and Frasers Centrepoint Limited 


Outlook 


 Developers trading near multi-year lows. 

  • The SG Developers (FSTREH Index) is down by c.8% YTD, in line with S-REITs and marginally outperforming the Straits Times Index (STI). The sector is now trading at an attractive P/Bk ratio of 0.7x, which is close to multi-year lows. 
  • SG Developers last traded at similar P/Bk levels in periods of economic stress in 1997, 2003 and 2009, which we believe is not the case going forward, especially with the Singapore GDP projected to grow by c.2.1% in 2016. As such, we believe that most negatives have already been priced into share prices. 
  • We see attractive risk/reward ratios at this level for SG developers with catalysts coming from a potential policy relaxation, which we believe will lift sentiments for SG developers. This, in our view, will likely come post a peak-to-trough fall in prices of close to 13-15% (current drop is close to 9% from the peak), estimated by the end of 2016. 


 SG developers de-risked residential exposure and have a higher % from recurring cashflows from its commercial portfolio. 

  • SG developers under our coverage have over the past few years – 
    1. de-risked their SG residential exposure by pre-selling a substantial portion of their unsold inventories and thus reduced their exposure to an average of 9% of RNAV, and 
    2. diversified their earnings base into other key gateway cities in Australia, Japan and the UK, and 
    3. relied more on their commercial portfolios to offer consistent cashflows. 
    Thus, the expected further drop in residential prices is not likely to drastically impact SG developers’ earnings. 
  • With the commercial segment, we are positive on the retail sector, with rental reversions projected to remain stable while the office sector should weaken further on the back of demand-supply imbalances. 



Risks 


 Persistent high land cost to eat into margins. 

  • The risk to our view is if residential land prices remain high and this would translate into higher completion costs and hence, potentially ‘sticky’ residential prices in the near term and delay potential relaxation measures from the government. 

 Commercial portfolio is also seeing weaker outlook. 

  • The commercial segment, especially the office sector, is expected to see weakening rents which could mean downside to estimates for SG developers going forward. 



Valuation & Stock Picks 


 SG developers to see price firm higher as the market looks towards policy relaxation as a sentiment boost. 

  • We believe that negatives from a weakening residential outlook in SG have been priced in and expect further declines in market residential prices to mean a step closer to government’s eventual easing of selective speculative measures currently in place. This is expected to be a sentiment boost to SG developers. 
  • The sector is trading at a 45% discount to RNAV currently, close to -1SD of the mean and downside could be limited at this level. 

 Prefer diversified plays. 

  • Under the above scenario, we prefer diversified companies with a multi-sourced income profile, with strong recurrent cashflows. 
  • We like developers with exposure to China (retail sector, Tier 1/Tier 2 residential sector) where we are seeing increasingly stronger data-points on a sustained recovery in performance. 
  • Our top picks are CapitaLand, Frasers Centrepoint Limited. 


Peer Valuation 








Derek Tan DBS Vickers | Mervin SONG DBS Vickers | http://www.dbsvickers.com/ 2015-12-17
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.73 Same 3.73
BUY Maintain BUY 10.26 Same 10.26
BUY Maintain BUY 2.05 Same 2.05
BUY Maintain BUY 1.32 Same 1.32
BUY Maintain BUY 8.47 Same 8.47
BUY Maintain BUY 2.73 Same 2.73


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