By Hong Leong Investment Bank
Neutral (maintain)THE Valuation & Property Services Department (VPSD) of the Finance Ministry had been quoted from a news report that the key takeaways of the VPSD’s official view include that the Malaysian property market is expected to be sustained at a lower growth rate in 2013, with growth in the number of transactions to moderate.
According to the VPSD, residential properties in certain locations would still be able to see a price increase, and that overall, it expects property prices to moderate amid more houses up for sale this year.
At the same time, the managing director of CH Williams Talhar & Wong said measures by the government, such as an increase in the level of real property gains tax and a 70% loan-to-value ratio for third residential property, has had a psychological impact on buyers and was putting a brake on transactions.
It is difficult to quantify the financial impact, but the macro scenario is applicable to Malaysian developers across the board, in our view.
We are encouraged to note that the abovementioned points are largely in line with our house view of the key sector trends for 2013, namely moderation of overall launches and sales in 2013, property prices likely to hold steady and intensifying competition as successful developers will need to be more selective of projects where they can compete on affordability and pricing.
We continue to regard landbank location as the key driver. In this regard we favour Glomac Bhd, as it is well positioned for 2013 with its highly-successful flagship Lakeside development at Puchong, whilst offering a rare combination of value (5.6 times financial year 2013 estimated price-earnings ratio), 4.9% dividend yield and growth.
Meanwhile the risks include sharper than expected economic slowdown and sudden loss of holding power by Malaysian home-buyers leading to a spike in non-performing loans (NPL) ratios.
The positives include asset reflation theme remains intact; the affordable segment remains untapped and Johor to start outperforming after years of neglect and under-performance.
However, the negatives include slowdown in demand for mid or high end segment, banks exercising more restraint and prudence in processing applications and granting approvals.
Our top pick is Glomac as it still offers the growth element in addition to an attractive 4.9% dividend yield while trading at a mere 5.5 times financial year 2013 estimated price-earnings ratio, but liquidity remains lacking. We give it a buy call with a RM0.97 target price.
BUILDING MATERIALS SECTOR
By RHB Research
THE International Trade and Industry Ministry (Miti) is taking back duty exemption on 18 grades of steel imports, effective Feb 1, 2013.
Based on our channel checks, the affected steel products may include a wide range of hot rolled coils (HRC) that Megasteel Sdn Bhd, the sole local HRC maker, also produces.
However, there is no change to duty exemption on steel products if: (1) They are used in the production of finished goods for exports; (2) They are not produced locally; and (3) They are used to produce finished products that are not yet produced locally.
The latest measure by the Government means local cold rolled coil (CRC) players will have to procure more input, such as HRC, from Megasteel Sdn Bhd (At present, on average, local CRC players procure about half of their requirements from Megasteel Sdn Bhd and import the remaining half). Prima facie, this is negative to local CRC players as HRC sourced from Megasteel Sdn Bhd is typically priced at a premium to international prices.
In addition, there has also been some issues with regards to the consistency in terms of quality of HRC sourced from Megasteel Sdn Bhd. However, if we are to read the latest measure by the Government as a start of a protectionist trend (that means the import restriction will eventually apply also to finished products of local downstream players, i.e. CRC, coated steel and welded steel pipes, etc), then the latest development may have a positive implication to downstream players over the longer term.
The risks include poor enforcement of latest measures introduced by Miti, weaker-than-expected recovery in global steel consumption that will weigh down on international steel prices and steep rise in raw material costs.
We maintain a neutral’ call on the sector as the global outlook for the steel sector in 2013 is likely to remain challenging due to the excess capacity and weak recovery in demand but we believe the steel industry is near to the bottom of the cycle.
Accelerating output cuts, massive destocking activities coupled with recently announced pro-growth policy in China will provide a strong support for international steel prices.
Locally, steel consumption will be sustained by large-scale infrastructure projects under economic transformation programme or ETP’ and stable growth for automotive and manufacturing (particularly electrical goods) sectors.