Profits dropped 70%, sell or hold or buy?

One of Malaysia’s largest developer, IOI Properties reported a 70% on quarter drop in net profit for Q1 of 2014. Government price-controlling measures were cited as one of the reasons. If you own their stock, what would you do now? Quickly sell? If you sell, they call this knee-jerk reaction. However if you did not sell and instead understand how the dynamics of a property stock goes, then you would know that for property developers, it is always cyclical. This is what IOI Properties said, ‘The outlook for the property market in both Malaysia and Singapore remains challenging especially in the high-end segment’  When we take this as serious, it simply tells us that perhaps their current product mix is more for the high-end segment and since the high-end segment has been slowing down since last year, without any doubt, it has affected them.

Buying a property stock is not like buying a retail stock like departmental store or even a REIT. most of the time for these stocks, it is much more stable in terms of their outlook. This also meant that it may be tough to suddenly report a 70% up in profits because all things being equal, the supermarket cannot suddenly sell many times more than what they are selling today due to the typical competition. The REITs also cannot suddenly increase their rental by 70%! Thus, it is very uncommon to see a property stock reporting almost identical profits every quarter.

Some other developer’s latest results are as follows: Glomac Bhd’s Q1 ended with a contraction of 10.35% despite a 14.9% increase in revenue due to higher land conversion premium and construction costs. IJM Land meanwhile saw its profits going up by nearly 4 times in it’s quarter ended Dec 31, 2013. Before you rush to buy, please note that this includes a one-off land sales and fair value gains. Without this extraordinary gain, its net profit actually went up by 17.4%. Let’s look at another developer, SP Setia. For the first quarter which ended on January 31, pre-tax profit rose by 8% when compared to the same quarter in 2013. 

Okay, what did you learn from all these thus far? Well, as at all the latest results, every developer reported profits, even if some saw the % dropping significantly or some gaining a moderate 8%. This is despite the fact the primary transactions has been dropping since the year 2012 and this is despite the fact that many of the new launches are now priced more reasonably. Should you buy the stocks now? I do not have sufficient resources to invest more money into stocks, but if you are thinking of holding the stock over a longer period of time, I think now’s the time to buy especially if the price has gone down due to some of these negative news of reducing profits.

written on 26 May 2014

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