Neutral - Property Developers (Earnings In Downtrend But Largely Priced in)

Developer’s results fort he first quarter ended march 31 2014 were mixed. Developers’ earnings were on a downtrend with most of them reporting weaker earnings on lower revenue and lower profit margins.

Developers with a stronger focus on landed properties or mid range condominiums fared better than their counterparts who focused on mid to high end condominiums or integrated.

Developers are facing margin squeeze – cost pressure is rising (higher land prices and higher building material, labor and compliance costs) but the ability to pass on the higher costs is limited by stiff competition, tightening of banks lending policy and weaker property market sentiment.

The developers’ 1QFY2014 earnings margin was generally weaker quarter on quarter.

The developers’ 1QFY2014 property sales were modest. However against a low based in 1QFY2013 the developers’ 1QFY2014 property sales were generally higher year on tear.

It is worth nothing that 1QFY2014 sales were the weakest quarterly sales since 2QFY2013. The introduction of new property cooling measures in Budget 2014 affected the availability of credit, property market sentiment and the number of new property launches.

Industry observers expect sales to pickup slightly in 2HFY2014 as developers adjust their pricing strategy and step up new property launches in 2HFY2014.

It is believed that the negatives are largely priced in (03 June 2014) and the downside risk to share prices is limited given that developers are now (03 June 2014) trading at 0.6 times to 0.7 times price to revised net asset value, broadly within their historical trading ranges, 2015 PER of 10.4 times, developers balance sheets are strong and their 2014 to 2015 earnings are still resilient.