Malaysian Fund Buys Property Stocks at 32% Discount to World

  • Property shares worst performers in Malaysia in past year
  • Eastspring starts `nibbling' stocks that have tumbled

Malaysia’s top-performing fund is buying the nation’s property companies after a slump in shares left valuations at their cheapest level in at least seven years relative to global peers.

Eastspring Investments Bhd. has started “nibbling” on some of the stocks that have been beaten down on the prospect the real-estate industry will eventually recover, Chen Fan Fai, the Kuala Lumpur-based chief investment officer, said in an interview on Oct. 9. He declined to identify the companies he’s buying. The Bursa Malaysia Property Index is valued at 8.9 times 12-month projected earnings, a 32 percent discount to the Bloomberg World Real Estate Index.

Chen’s optimism offers a rare bright spot in a stock market whose value has slumped 14 percent this year as international investors unloaded Malaysian equities amid political turmoil, falling oil prices and a selloff in emerging-market assets. The FTSE Bursa Malaysia KLCI Index has dropped 2.5 percent so far in 2015, set for its second year of declines, the longest losing streak in 17 years.

“We don’t expect them to perform in the next few months, but valuations have come to a point that it is worthwhile to start buying,” said Chen, whose small-cap fund has beaten 90 percent of peers over the past three years with an overall return of 31 percent, according to data compiled by Bloomberg. “Some companies have been beaten down and we believe some are actually below what is fair, factoring in the slowdown right now.” 

Worst Performers

The property gauge of 92 developers on the Kuala Lumpur stock exchange slid 0.2 percent at the 5 p.m. close. The measure has tumbled 14 percent in the past 12 months, the worst performing industry group, as record household debt, a consumption tax and stricter lending hurt buyers’ ability to purchase homes. While these factors put pressure on companies faced with the biggest housing glut in 10 years, recent declines have made some of them too cheap to ignore, said Chen, whose company is part of Prudential Plc’s asset management business in Asia.

Among developers, UEM Sunrise Bhd., whose stock has fallen 29 percent in the past year, is trading at 13.7 times projected 12-month earnings, below its five-year average of 27, Bloomberg data show. The stock climbed 1.7 percent on Monday. Mah Sing Group Bhd., down 23 percent, is trading at the cheapest level in more than two years. SP Setia Bhd., Malaysia’s biggest property developer, has a multiple of 11.7, near the lowest level since 2006.

Headwinds Ahead

Not everyone is buying. Jason Chong, the Kuala Lumpur-based chief investment officer at Canada’s Manulife Asset Management Services Bhd., said the industry is facing too many headwinds. 

“It is hard to be bullish on the property market right now,” he said. “Property is not one of our favorite sectors now. Values are starting to emerge. But the question is, how long must you hold to realize these values?”

Profits for companies in the property gauge are expected to drop 46 percent in the next 12 months, compared with a growth of 11 percent for the benchmark FTSE Bursa Malaysia KLCI Index, according to data compiled by Bloomberg. 

Residential property transactions slid 2.6 percent in the first half of 2015, compared with the same period a year earlier, government data show. Property prices in the first quarter grew at the slowest pace since 2009 amid the biggest incoming supply of properties in 10 years, Quah He Wei, analyst at AllianceDBS Research Sdn., wrote in a report last month. 

Malaysia Property Stocks Cheapest Since 2008 vs Global Peers
Malaysia Property Stocks Cheapest Since 2008 vs Global Peers

Slowing Growth

The nation’s economy expanded the slowest pace in almost two years in the second quarter after a new consumption tax curbed private spending. Gross domestic product is forecast to grow 4.5 percent to 5.5 percent this year, down from an earlier projection of as much as 6 percent.

Overseas investors have unloaded 17.6 billion ringgit ($4 billion) of Malaysian equities this year amid prospects of higher U.S. interest rates and political instability at home. Prime Minister Najib Razak has come under fire over debt accumulated by state investment company 1Malaysia Development Bhd., whose advisory board he chairs, and about $700 million of political donations. Najib has denied any wrongdoing. 

SP Setia, UEM Sunrise and Mah Sing said in e-mailed interviews that the property outlook remains “challenging” and that the subdued demand will spill into next year. Some are looking to lure buyers with prizes such as a 1 million ringgit cash voucher, a 388,888 ringgit ($93,000) Jaguar XF and business class trips.

Impacting Sales

“Weaker sentiments as well as difficulties obtaining end financing approval have impacted sales for the year,” Ng Chai Yong, chief executive officer of Mah Sing, wrote in an e-mailed response to questions. The company has increased its marketing activities this year while slashing its new property launches by almost half, he said.

Some developers say selling lower-priced products have helped them weather the slowdown. Khor Chap Jen, acting president and CEO for SP Setia, said its mid-priced range product this year had been “very successful” and will help it achieve its 4 billion ringgit sales target this year. The company’s single-story bungalow project last month achieved a 70 percent take-up rate in one weekend, he wrote in an e-mail.

“The property cycle comes and goes and eventually it will pick up,” Eastspring’s Chen said. “There aren’t many screaming opportunities in the market right now. What we look for are beaten down stocks that are still with sound fundamentals,” he said.

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