SINGAPORE (Oct 3): CIMB Research is keeping its sector “overweight” view on Singapore’s property development and investment sector following the URA property price index’s (PPI) reversal from its downtrend in 3Q17, bringing private residential prices back to around 4Q16 levels.
In a Monday report, analyst Lock Mun Yee notes that while property stocks – which are currently trading midway between average and -1 s.d. discount to mean – have outperformed year to date (YTD) and she believes the sector will continue its strong performance given the evidence of volume and price recovery.
The PPI’s 0.5% q-o-q improvement reaffirms her view that the private residential market is on the mend, on the back of higher y-o-y buying demand, she adds.
“Prices in the Core Central Region (CCR) and Outside Central Region (OCR) were also 0.2% and 0.7% q-o-q higher, respectively, while those in the Rest of Central Region (RCR) remained stable q-o-q,” observes Lock.
“Against the more positive backdrop, developers have been tapping both the government land sales as well as the en-bloc markets to replenish their inventory. More importantly, with rising land costs, replacement costs have risen and we think some growth expectation in forward pricing has been factored into end product prices. With completions expected to decline over the next 2-3 years, we believe the nascent price recovery could be sustained,” says the analyst.
As such, Lock continues to favour developers including CapitaLand for its ROE-boosting capital recycling activities. The stock has been given a target price of $4.21, and is trading at a 32% discount to revalued net asset value (RNAV) estimates.
City Developments (CityDev), which has a target price of $12.54, is another choice pick for its strong Singapore and overseas residential earnings that continue to underpin the group’s near-term growth. In Locks’s view, CityDev’s low gearing and resumption of its landbank restocking activities should continue to support its RNAV expansion.
Lastly, Lock likes UOL Group for its high recurring income base, underpinned by its rentals, hotel operations and investment holdings segments – with additional office exposure through its associate, United Industrial Corporation (UIC). The counter has a price target of $9.03 and is trading at a 28% discount to RNAV.
All three counters have been rated “add” by CIMB.
“Potential catalysts are good response to new launches and increased land restocking activities that could boost RNAV and prices. Key risks include faster-than-expected rise in mortgage rates or increased unemployment, which could derail demand,” concludes Lock.
As at 10.26am, shares in CapitaLand, CityDev, and UOL are trading at $3.63, $11.47 and $8.17 respectively, representing 17.9, 16.8 and 17.3 times FY18 forecast earnings.
