Property
More upside for residential counters

Despite the weak economic data and the strong performance of property stocks over the past month, forward price to book (P/B) valuations indicate ample upside ahead on the road to recovery, says UOB KayHian Research.

The Ministry of Trade and Industry (MTI) has reported a worse-than-expected 1Q09 GDP growth advance estimate of -11.5% year-on-year (UOB: -8.2%; consensus: -8.6%). The MTI has cut its full-year growth forecast further to between -9% and -6.0% from -5.0% to -2.0% previously. UOB Economic-Treasury Research has revised its forecast to a 7.5% contraction from its previous expectation of a 4% contraction.

Despite the weak economic data, property counters have continued their uptrend, rising 4-10%. On a quarterly basis, the Real Estate & Development Index (FSTREH) increased 14%, outperforming the Straits Times Index (FSSTI), which was up 8%. The top performers were CapitaLand (+24%) and Wing Tai (+19%); laggards were City Developments (+2%) and GuocoLand (+5%).

Continued outperformance expected on road to recovery.
Past recessions have shown that stock markets typically bottom out in or slightly before the first very sharp GDP contraction quarter. On a market recovery, property developers and banks are the first to rally from a recession trough ahead of other sectors that typically lag by six months.

With the full-year GDP contraction expected at 7.5%, the steep 11.5% contraction in 1Q09 GDP is most likely the first quarter to experience a sharp contraction. We expect property counters to be the key beneficiaries leading the way to recovery.

Ample upside potential.
Given the strong share price performances of property stocks over the past month, we have reviewed the upside potential based on the 6-month and 12-month forward P/Bs from the Asian financial crisis (AFC) trough valuations. Property stocks provide good upside potential to these forward valuations and long-term historical mean P/B valuations. City Developments and Wheelock offer good upside to the 6-month forward P/B valuations.

Maintain OVERWEIGHT; Target prices raised
We have raised our target prices by 0-45%, narrowing the discounts to RNAV by 20% for property stocks with BUY and HOLD recommendations, assuming we are on the path to recovery with GDP growth having bottomed in 1Q09. City Developments is our top pick among large-cap stocks. Keppel Land and Allgreen are our preferred picks among small- and mid-cap stocks.

DISCLAIMER:
We have based this document on information obtained from sources we believe to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Expressions of opinion contained herein are those of UOB Kay Hian Research Pte Ltd only and are subject to change without notice. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of the addressee only and is not to be taken as substitution for the exercise of judgement by the addressee. This document is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any securities. UOB Kay Hian and its affiliates, their Directors, officers and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add to or dispose of any such securities. UOB Kay Hian and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discussed herein (or investments related thereto) and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies.

More

Investor Watch