Potential for M&A, privatisation on lower property developer valuations
KUCHING: As property developers continue to face margin compressions and less-than-ideal earnings, analysts wonder if the prolonged low valuations would trigger mergers and acquisitions ( M& As) or privatisation plays.
Kenanga Investment Bank Bhd ( Kenanga Research) said for big land-bank owners, their landbank costs are based on historical acquisition costs with bulk of acquisitions made many years ago, implying low land costs compared to prevailing market value.
This also means that the company’s valuations imply no further development profit, it said.
“However, at this juncture, we have yet to hear of any whispers on the matter,” it opined in a sector outlook yesterday. “It is also our view that while small-mid cap players are also trading at very low price to book values ( PBVs), they are less likely to undertake any privatisation plays as their listing status is essential for their branding and positioning in the market.
“The assumption here is that their current listed entity is the only one listed, meaning no sister or mother listed companies.
“Based on our observation over the years, privatisations are likelier if there are other listed mother/sister companies while M& As tends to be strategic, likely involving government-linkedc company (GLC) driven ones.”
Most of Kenanga Research universe’s forward price earning ratios ( FPERs) were roughly near to slightly above historical averages, though the FPERs levels might not be representative as a comparison since earnings are retrospective for a developer while some have high earnings volatility, rendering PER valuations methods less meaningful.
This comes as property developers’ earnings quality remain a challenge as margin compression risk is still present, while local sales targets are still facing pressures due to the housing overhang in the market and challenging lending liquidity to the sector, it added.
“This was observed during the last reporting season. Hence, we see no compelling recovery in developers’ return on equities ( ROEs) in the next 12 to 24 months,” it added.
A sector catalyst is the final property crowdfunding framework. The Securities Comission had put out a public consultation paper on the proposed regulatory framework for property crowdfunding for public feedbacks last month.
“If the framework is received positively, we believe this will be the start of many potential property crowdfunding platforms, which could address the current issue of tighter banking liquidity given strict lending guidelines.
“Depending on the scale and parameters, this could be a game changer and a rerating catalyst for developers.”
Notably, property stocks have rebounded in 1QCY19, in-line with the broad-market and also due to the sector’s share prices being heavily bashed- down over 2018.
However, the sector still lacks fresh catalysts with margin compression risks still looming while the lending environment remains challenging.
“We expect the sector to remain range-bound until there are significant catalysts or earnings improvements for future ROE recovery.”