Why a short-term rally in property stocks is possible
A few weeks ago, Ayala Land (ALI) and SM Prime (SMPH) disclosed their full-year earnings results which contained both good and bad points.
On the positive side, both companies disclosed strong double-digit earnings growth. For the full-year, ALI’s net income grew 15.2 percent year-on-year (yoy) to P28.2 billion while SMPH’s profits rose 14 percent yoy to P45.6 billion. In fact, SMPH’s performance was better than expected as full-year earnings were around 4 percent higher than our forecast.
However, SMPH’s reservation sales for fiscal year 2024 reached only P55 billion, down 46.1 percent from P102 billion in 2023.
Meanwhile, although ALI’s full-year takeup sales increased by 12 percent to P127.1 billion, its fourth-quarter takeup sales were down 5 percent yoy. In fact, takeup sales have been down sequentially for two straight quarters and are now at their lowest level in the past 10 quarters.
We recognize that the near-term outlook for property companies is not very good given the huge glut in office space and condominium developments in Metro Manila. This is why both stocks have not been performing well lately, with ALI and SMPH down by 43.5 percent and 33.1 percent from their September peak levels respectively.
Nevertheless, we believe that the sell-off is overblown as the negatives are already priced in.
For example, both ALI and SMPH are trading at very depressed P/E (price-to-earnings) multiples that are way below their 10-year historical averages. ALI is currently trading at 9.7X P/E vs its 10-year historical average of 20.4X, while SMPH is trading at 13.2X P/E vs its 10-year historical average of 27.2X.
Moreover, the two stocks are already trading below their pandemic lows of P22.95 for ALI and P24.70 for SMPH. Note that the said levels were hit in March of 2020 when investors sold property stocks in panic due to uncertainty on how the lockdowns would impact their profits. However, we don’t think ALI and SMPH deserve to trade back at their pandemic lows given that ALI’s 2024 profits are already 225 percent higher compared to 2020, while that of SMPH is up 153 percent. Even if the glut will lead to weaker earnings in the future, I doubt if net income will fall significantly enough to match their 2020 level.
Finally, although concerns about the value of SMPH’s reclamation project and land bank are valid given the huge glut in the Manila Bay area, the stock’s current market capitalization only reflects the cap rate value of its malls, offices and hotels which are still performing well. Note that SMPH is still predominantly a mall operator, with malls accounting for 68 percent of its total profits.
Because the negatives are priced in, we think there is a possibility that we could see an oversold rally in the short term. In fact, the BSP’s surprise announcement of a 200-basis points cut in banks’ reserve requirement ratio two weeks ago is favorable for property companies as the said development is expected to lead to higher liquidity and lower lending rates, making property purchases more affordable for buyers.
The caveat though is that any rally might be limited in magnitude. This as a lot of investors would most likely still be cautious towards property stocks given expectations that the property companies’ office leasing and condominium sales businesses would stay under pressure in 2025 given the huge oversupply prevailing. Consequently, those who only have a short-term investment time horizon should be prepared to sell on rallies as both stocks would most likely stay volatile in the near future.
