Analysts split on whether it is time to go bargain-hunting
By UMA SHANKARI
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PROPERTY stocks have taken a beating - with the valuations of some already below their previous troughs - but analysts are split on whether investors should go bargain-hunting.
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'Property stocks are indeed cheap at the moment,' wrote CIMB analyst Donald Chua in a March 4 report. On an adjusted price to book value basis and assuming asset writedowns and possible book-value dilution if stocks are recapitalised through rights issues, valuations for many stocks under CIMB's coverage appear to have touched levels in the last trough of 2003, he said.
However, 'there is a distinct possibility of valuations exceeding previous lows', he said. He advised steering clear of the entire sector, given the risks of more capital raisings and inventory build-up.
But if one has to buy property stocks, Mr Chua said a developer's balance sheet is key. 'Balance sheet remains our key criterion for stock selection. In this regard, we remain buyers of City Developments and Wheelock.'
Morgan Stanley analysts Melissa Bon and Brian Wee said in a March 5 report that investors should not buy property stocks aggressively. 'While we do agree a lot of negatives have been priced in property developer share prices currently - implying historical low residential and office valuations - however, given that we are facing an unprecedented macro crisis, our bear cases attempt to capture further downside by assuming physical property valuations lower than what history suggests,' the analysts said.
'Hence, we reiterate our recommendation that investors should remain nimble in property stocks and not accumulate aggressively until hints of a macro recovery are seen, possibly in H2 2010.'
Of the six property stocks it tracks, the firm issued 'equal-weight' calls on four stocks and 'under-weight' calls on the other two - and no 'buy' calls.
OCBC Investment Research analyst Foo Sze Ming said in his March 6 report that his sector strategy is to stay defensive and stick with developers with strong balance sheets, diversified earnings streams, low exposure to the high-end residential segment and which are also now trading at valuation beyond the previous trough.
UOL Group meets these criteria and remains the firm's top pick for the sector, Mr Foo said.
OCBC Investment Research also has 'buy' recommendations on CapitaLand, Keppel Land and Soilbuild Group.
Looking ahead, analysts said that asset writedowns and financing remain key issues for developers.
Asset writedowns and land-bank provisions started during the fourth-quarter earnings reporting season. 'But with a few exceptions, most developers only wrote down insignificant amounts, translating to an average 1-6 per cent of total asset values,' said CIMB's Mr Chua.
'This is hardly a reflection of reality, in our view. We believe it is a matter of time before we see more aggressive writedowns.'
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