Mixed news on 19 Apr 2012

Proposal with minimal Govt funding favoured for high-speed KL-S'pore rail bids

PETALING JAYA: The private sector will be invited to come out with a proposal that requires minimal Government funding for the development of the high-speed rail (HSR) project linking Kuala Lumpur and Singapore if the project gets the green light.

Land Public Transport Commission (SPAD) chief executive officer Mohd Nur Ismal Mohamed Kamal said if the project received the go-ahead from the Government, the authorities would favour a proposal from private parties that would involve the smallest amount of financial assistance from the Government.

“But we also know that a rail project can seldom sustain itself financially. No operator can bear the cost of infrastructure, land acquisition, signalling system and rolling stock from the collection of fares alone as it will never pay for itself.

“Rail projects will require some forms of assistance from the Government, but we are looking at the least form of assistance,” he told the press at an editors' briefing on SPAD's plan and key projects yesterday,

Briefing by SPAD officials for media editors: From left SPAD chief development officer Azmi Abdul Aziz, SPAD chief executive officer Mohd Nur Ismal Mohamed Kamal and SPAD chief operating officer Azhar Ahmad. - Starpic by AZLINA BT ABDULLAH

Ismal said the HSR project was now in the second phase of a feasibility study that looked into the actual corridors and alignment. This is expected to be completed by year-end.

“This study will provide a more detailed economic impact of the HSR and its engineering challenges,” he said.

He said this time around, the HSR study would be more comprehensive in looking at matters that largely revolved around national interest in contrary with previous HSR proposals that came from the private sector.

It was reported that the idea on the HSR came from Performance Management and Delivery Unit laboratory.

On the comparison with KTMB services when its double-tracking is completed, Ismal said the KTMB services would cater to the mass market and freight transportation, while the HSR was targeted at the high and middle-income markets.

SPAD was also in the midst of finalising plans for the Bus Rapid Transit (BRT) project for the Klang Valley, which should draw interest from construction companies because it entails building extra bus lanes in the city centre.

“We have already embarked on the traffic impact assessment study, which is expected to be completed by year-end and we plan to start physical work early next year.

“The project will take 12 to 18 months to be completed and will be fully funded by the Government. It will have to go through an open tender procurement process,” he said.

On the Rapid Transit System project, which links Johor Baru and Singapore, Ismal said: “The project will be funded by both Malaysia and Singapore. As of now, the tender for consultancy services for the alignment and design of the project is closed,” he said.

These three projects were part of SPAD's 50 priority projects from a total of more than 200 projects that has already gained traction or will begin this year.

“The development of the 50 projects is on-going. Some of the projects are still in the concept stage and haven't obtained the commitment from the Government.

“But, we are pushing forward the projects for the development of public transport. We are doing our best to convince the Government that in certain cases that are no other available options but to put in the infrastructure,” he said.

On the mass rapid transit, Ismal said the study for the second and third lines would start early next month.

_________________________________________________________________________________

Property continues climb

The price of homes expected to advance 5% to 10% this year

PETALING JAYA: Overall price appreciation for residential properties is expected to range between 5% and 10% this year, according to CIMB Research.

In a report, the research unit said residential properties' price appreciation could be even higher but it believed that the Government would continue to remain vigilant on “runaway” property prices.

CIMB Research said in terms of house price appreciation, despite the slower real GDP (gross domestic product) growth projection of 3.8% compared with 5.1% in 2011, it believed that 2012 would be another good year due to several factors.

“Buying momentum continued to be strong, driven by inflationary fears.

“Supply growth should remain depressed as developers have only just started to focus more on affordable homes costing not more than RM500,000 in the Klang Valley.

“Major infrastructure improvements in the Klang Valley such as the MRT (My Rapid Transit), River Rehabilitation and covered walkway projects will help boost property prices.”

CIMB Research said although the residential property market would continue to set new records in 2012, it was expected that there would be a slowdown in the increase in overall transaction values in 2012 after two years of high growth that averaged around 30%.

“In view of credit-tightening measures by the central bank, we believe that the growth in transaction value should slow to 10% to 12% this year.”

CIMB Research noted that in 2011, the growth of residential property supply in Malaysia fell to 1.5%, which was the lowest on record.

The slowdown in supply growth was most pronounced in the big three markets (Johor, Penang and Klang Valley), which recorded an average growth of 1.2%.

The only states to buck the slowing trend were Terengganu, Kelantan and Perlis.

“If supply growth continues to lag behind population growth, house prices can only head in one direction.”

It was noted that major developers such as SP Setia Bhd, UEM Land Holdings Bhd, Mah Sing Group Bhd and UOA Development Bhd were all gunning for sales records this year and growth rates ranging from 10% to 35%.

It was also pointed out that the risks to CIMB Research's volume and price projections for 2012 included the global economic outlook and the local stock market performance.

However, CIMB Research is not optimistic about the commercial property market in the Klang Valley as oversupply will plague the sector for many years to come.

It noted that occupancy rates for the office and retail sector had started to drop.

Meanwhile, future supply of hotel rooms (under construction) in the Klang Valley is likely to depress occupancy rates in the coming years.

According to CIMB Research, UOA Development would be the biggest winner in a Klang Valley property boom as the company has no exposure elsewhere.

The research unit is also optimistic about the prospects for Johor, particularly Nusajaya, as 2012 would see the completion of various catalyst projects.

“The biggest beneficiaries of a property boom in Johor would be UEM Land due to its vast holdings in Nusajaya and SP Setia which is the dominant developer in the state.”

CIMB Research maintained its “trading buy” call on the property sector, but pointed out that property stocks could be sold down heavily in the event of an unfavourable general election outcome.

_________________________________________________________________________________

Analysis: Spluttering economies to curtail earnings horizon

LONDON (Reuters) - Exuberant global markets have taken a reality check this month on chronic U.S., Chinese and European growth concerns, and investors should hold companies' relatively rosy profit outlooks up for scrutiny too.

"Cheap" valuations based on historical price/earnings ratios have kept many investors bullish on world equities over the past three years despite what now appears to be routine economic disappointment and seemingly shorter business and profit cycles.

But there is growing anxiety that temporary sentiment and stock price boosts related to central bank money printing and emergency lending bear little relation to the long-term profit outlook, among non-financial firms at least.

Even though 12-month forward price/earnings ratios for world equity look good value, periodic pops in prices have increasingly not been matched by rises in earnings projections which have started to move sideways.

As ever, either the price in this P/E ratio is indeed cheap or earnings projections need a reality check too and historic valuation averages are restored by a drop in the profit outlook.

Macroeconomic hopes hinge on a U.S. recovery gaining more traction, a soft landing of Chinese growth to about 7.5 percent from the double digits of the past decade and a resolution of euro zone's systemic sovereign debt and banking problems.

All three of these, however, were in doubt again in April and the anxiety knocked some 5 percent off MSCI's world equity index from their March peaks. That leaves stocks still up 8 percent on the year but, just like last year, the price momentum and direction seems to have stalled.

Even though bouts of central bank money-printing and cheap lending in the United States, Europe and elsewhere periodically offer a fillip, as the European Central Bank's money flood did again spectacularly in the first quarter, the effect on the real economy and market prices tends to fade fast.

In the event, the P of the PE ratio advances and retreats, but not the E - leaving bulls to state their case continuously on each pullback but pessimists to question the whole construct.

"Do people really think E would be as good without the massive QE (quantitative easing)around the world?" asked hedge fund manager Stephen Jen at SLJ Macro Partners.

SLICED AND DICED

Of course, there are many ways to dissect valuations and many regional and national comparisons.

For one thing, many investors are currently overweight U.S. equity on a belief that a steady if unspectacular recovery there contrasts to economic contraction and systemic problems in Europe and the slowdown in China and the emerging markets.

But, just as vastly superior growth in emerging markets last year did not stop their emerging equity universe significantly underperforming, questions of valuation and the best models to use have prompted some strategists to question a U.S. bias.

Richard Cookson, chief investment officer at Citi Private Bank, reckons the U.S. market may be cheap when comparing a forward P/E ratio of 12 with a trailing P/E of 15, but he said forward earnings are just a guess and take no account of whether you are at the top or bottom of the profits cycle.

"The problem with using either of these valuation metrics is that they're pretty rubbish as a guide to future returns," he said. "The consensus has completely failed to predict any fall in profits over the past 30 years."

Cookson said he prefers the U.S. Shiller P/E model that works like a moving average of the past 10 years of profits to iron out the cycle and combined with dividend yields works well as a guide to implied 10-year returns.

At 22.2, however, the Shiller P/E is pretty expensive compared with the average since 1950 of 18.7. And while this partly relates to impressive U.S. corporate margins, these margins - as measured by profits as a percentage of nominal gross national product - are already at record highs of over 7 percent.

As margins have a pretty strong tendency to revert to their average over time, this leaves U.S. stocks "dangerously exposed", Cookson said, adding that far cheaper equivalent European valuations at least pay investors for taking the greater systemic and growth risks there.

Citi's implied long-term equity return in core Europe at 11.8 percent, for example, is more than twice that in the U.S. at 4.6 percent. And it's hard to imagine a scenario where a full-scale euro meltdown - if that's what such low euro zone equities imply - would not send systemic shockwaves across the Atlantic too.

What's more, ThomsonReuters data shows that margin gains from cost-cutting in jobs, pay and other expenses was a significant part of the U.S. profit recovery since 2009 but that this route to bottom-line improvement is reaching its limits.

Only 41 of S&P500 firms releasing first quarter earnings this month are expected to report higher margins despite lower revenue, down from 86 in 2009. And 102 companies are expected to show lower earnings despite rising revenue, up from 54 in 2009.

The U.S. does not have to return to recession for investors to wonder where the extra juice for earnings growth is going to come from.