AS the property sector correlates directly with the health of the economy, property counters on Bursa Malaysia have not been able to ride on the stock market rally over the last six months, even though most of the market — especially sectors benefiting from the Covid-19 pandemic such as rubber gloves and technology— reached multi-year highs.
Buyers will commit to purchasing big-ticket items only when they are confident of the economy. The fact that property prices are still astronomical in some places despite a general pullback adds to the sluggishness of the market.
The Bursa Malaysia Property Index (KLPRP) is trading at a steep discount to book value, and as at the second quarter ended June 30 was trading at 0.36 times book value — the second-lowest level in over 40 quarters.
This provides value hunters with an opportunity to start taking a position in property counters. Which ones are a safe bet, though?
TA Securities property sector analyst Thiam Chiann Wen recommends Glomac Bhd, as the company’s RM403 million of planned new launches and RM660 million of unbilled sales provide sustainable income to the group.
In addition, its product mix is skewed towards affordable landed properties in the Klang Valley, which are more in demand than high-rise, high-end products.
“The doubling of its sales in the first quarter on a year-on-year basis indicates that its products are what the market needs,” Thiam tells The Edge. In the first quarter ended July 31 (1QFY2021), Glomac’s sales doubled to RM50 million.
Glomac’s sales were driven by demand for its projects in Saujana Perdana in Sungai Buloh and 121 Residences in Petaling Jaya. Its unbilled sales could last the group two years, assuming there are no additional sales, which is quite unlikely.
At the same time, Glomac is also quite conservative when it comes to its capital management. Its net gearing stood at 0.28 times, which is at the low end for small-cap property developers, according to Thiam.
Within her coverage of small-cap property developers, Thiam compares Glomac with the likes of Ibraco Bhd and Hua Yang Bhd — both with a net gearing of 0.5 times, she says. Despite the low net gearing ratio, she says Glomac has managed to strike a balance between paying out healthy dividends and conserving cash.
As at July 31, the developer’s cash and bank balances stood at RM171.2 million, compared with RM159.88 million in the same period last year. The company has also consistently paid dividends; in FY2020 ended April 30, it declared a payout of one sen per share.
Assuming that a shareholder’s cost of investment is 31 sen per share in Glomac, the one sen per share dividend translates into a yield of 3.23%, which is good, although unexciting. Given that its net gearing is still low, Glomac can afford to declare a higher payout if it feels it has the capacity to do so.
Thiam has a “buy” call on Glomac, with a target price of 36 sen per share, which is premised on the group’s focus on the affordable landed residential segment, solid unbilled sales to anchor near-term earnings as well as its healthy balance sheet.
Nevertheless, there are things that investors ought to be aware of.
In 1QFY2021, Glomac recorded net profits of RM2.78 million, down 19.7% y-o-y, owing to a decline in revenue as a result of the Movement Control Order (MCO) — which put a halt to construction — as well as the completion of certain projects in the previous financial year.
The Covid-19 pandemic is still the biggest disruption to the economy and will continue to have an impact on Glomac’s sales in the foreseeable future. Already, the group has reduced its planned launches for FY2021 to RM403 million, against the previously guided RM613 million.
Owing to the MCO, it has put on hold its plan to officially launch the RM1.6 billion Greentec project in Puchong. The first block of Greentec, comprising small office/home office and serviced apartments with a gross development value (GDV) of RM154 million, was supposed to be launched this financial year.
Glomac has also postponed the launch of Rumah Selangorku apartments — valued at RM56 million GDV — in its upscale Lakeside Residences township in Puchong.
“In view of the reduction in planned launches, we cut our FY2021/22/23 new property sales assumptions by RM50 million a year to RM370 million/RM400 million/RM450 million respectively,” states Thiam in her report.
“Taking into account the slower work progress in 1QFY2021 as well as the lower property sales assumptions, we reduce our FY2021/22/23 earnings by 18%/2%/5% respectively.”
There are fears that its retail mall Glo Damansara may be a drag on the group, as it has been losing tenants, the latest being the loss of its anchor tenant Samanea Group, which used to take up 40% of its net leasable area.
This was the basis for the “sell” call by the only other analyst covering Glomac, Wong Wei Sum of Maybank IB Research, whose target price of 23 sen is 25% lower than the company’s current 31 sen.
“Glomac’s ability to secure new tenants at Glo Damansara remains our major concern in view of rising competition from the surrounding suburban malls,” Wong says in a report dated Sep 24.
The counter’s liquidity is also another concern, as it has been thinly traded over the past month, probably because the market is waiting for a fresh catalyst for the property development sector, says Thiam.
“There is value in property stocks, as they are trading at a steep discount to their book value … We shall see what’s in store for the sector in the upcoming budget.”
