New Accounting Method likely to Affect Property Stocks

The International Financial Reporting Interpretations Committee on Real Estate Development (IFRIC 15), which will become applicable for the accounting period commencing July 1, is likely to affect investor sentiment in property stocks, analysts said.

Under the new ruling issued by the Malaysian Accounting Standards Board, property developers are to recognise revenue based on the completion method instead of the percentage-of-completion method in current practice.

ECM Libra Capital Sdn Bhd research head Bernard Ching said the new ruling could deter shareholders that based their investments on a company’s earnings.

“Investors that are not so sophisticated and less informed about the company’s operations will be deterred when they notice that the company’s earnings aren’t so consistent,” he told StarBiz.

“Fundamentally, this new ruling does not change anything as there is no cashflow impact. The only difference is recognition of the company’s accounting profits,” said Ching.

He said developers exposed to strata-high-end projects, which often take three years (as opposed to landed residential projects that take only two years) to complete would be most affected.

“Developers with projects that are few and spaced would have the most impact as opposed to say, township developers that have more projects. Large companies with good track records are least likely to see any impact.”

Ching said a way around this was for developers to become more transparent with their investors.

“The bulk of the listed property companies do not engage their investors. Companies like Sunrise Bhd are great at engaging investors, as they have regular analyst briefings and are quite transparent with their projects.”
“It’s up to the developer to be more transparent with their launches. Companies that consistently make headlines will continue to do well under the new ruling.”

An analyst from a local bank-backed brokerage who requested anonymity called the new ruling “silly.”
“It’s a silly rule. What is wrong with the way earnings are reported that requires it to be amended? Whoever came up with the ruling I feel has zilch industry experience.
“In terms of dollars and cents, it’s business as usual for the developers. Only on paper does it look different. However, it would deter investor confidence as company earnings would look choppy.”

He, however, added that the reaction, if any, would be temporary.

“Investors who are not aware may be shocked and this may create a knee-jerk reaction. But I think after a while, they will adjust.”
The analyst said he wasn’t going to revise his outlook for property stocks because of a “change in accounting rules.”

“A company’s share price is based on cashflow, not on accounting profit. A change in accounting rules does not mean the company isn’t making money.”

Affin Investment Bank, in a recent research report, said earnings for developers were expected to be lumpy and volatile, and might appear negative on the surface.

“Analysis on profit and loss, such as profit margins, (including quarterly earnings) will be tough, as it will be purely based on the guidance from developers on their job completion schedule. Earnings from newly launched properties can only be seen two to three years after the properties are completed.

“As such, valuations based on earnings are not quite valid to reflect future earnings prospects. Instead, valuations based on RNAV (revised net asset value) will be widely used to assess the relative attractiveness of different property stocks,” it said.

The research house does not anticipate developers to continuously launch projects just to have a healthy balance sheet.

“The property sector is known to be cyclical in nature and pretty much depends on economic conditions. Despite the adoption of IFRIC 15, we believe developers will still launch new properties at the best and right time that they reckon.

“Rolling out new properties regularly to smoothen out earnings does not make sense as developers will have to carry higher inventory, especially during bad times, which slows down turnaround time.”

It also said developers with fewer launches and smaller landbanks could be badly affected.

“Earnings could be in the red for a few years before we see positive earnings contribution from property sales. Furthermore, companies which have established a dividend policy may not be relevant anymore and investors and analysts will have to depend on guidance from management.”

Well, this will be a great time to buy property stocks when the weak holders give out!

EU:The Euro Defence Package

This is a newly posted report from AP.

In consonance with IMF action, the European Union finance minsiters sprung into action on Monday on a euro720 billion EU and International Monetary Fund safety net for troubled eurozone countries, hoping it will keep markets from targeting the weaker members of the 16 countries that use the embattled euro.

Under the three-year aid plan, the EU Commission will make euro60 billion ($75 billion) available while countries from the 16-nation eurozone would promise bilateral backing for euro440 billion ($570 billion).
The IMF would contribute an additional sum of at least half of the EU's contribution, or euro220 billion, Spanish Finance Minister Elena Salgado said.

The EU's monetary affairs commissioner, Olli Rehn, said the agreement "proves that we shall defend the euro whatever it takes."

The agreement was reached after marathon 11-hour talks in an emergency finance ministers' meeting hastily convened Sunday amid concerns that the financial crisis sparked by Greece's runaway debt problems had begun to spread to other financially troubled eurozone countries such as Portugal and Spain.

Earlier report

Brussels: European Union finance ministers were considering a euro500 billion ($645 billion) defense package for the embattled euro, hoping it will suffice to keep markets from targeting the eurozone's weaker members, EU sources said late Sunday.

Rushing in frenzy to finalize an agreement before Asian markets officially open Monday, the ministers were discussing an aid plan that would have the EU Commission make euro60 billion ($75 billion) available while countries from the 16-nation eurozone and the IMF could combine with a promise to back bilateral loans and guarantees for up to euro440 billion ($570 billion).

Spanish Finance Minister Elena Salgado, speaking as she arrived for an emergency meeting of the European Union's finance ministers in Brussels, said they were determined to safeguard the currency used by 16 of the EU's 27 member states.

The euro has come under increasing pressure since the financial meltdown of one of its members, Greece.
France and Germany, the two largest members of the eurozone, agreed on measures to resolve the European financial crisis, according to a two-sentence statement from French President Nicolas Sarkozy's office Sunday.

But Britain sought to maintain a clear monetary line between the problems of the euro and its cherished pound.

"I am very, very clear that if there is a proposal to create a stability fund for the euro, that has got to be a matter for the euro-group countries," British Chancellor Alastair Darling told the BBC.

"What we can't do is to provide support for the euro. That has got to be for those countries that use the euro."
The ministers hoped to announce a deal before trading opened in Asia, if a qualified majority of the 27 EU finance ministers sign on.

Sarkozy's office said he spoke with President Barack Obama and the two leaders agreed on "the need for a large-scale response to the current disorders that are affecting the markets."

The EU's slow response to the crisis and its failure to keep Greece from reaching the brink of bankruptcy triggered slides in the euro and global stocks last week, and intensified fears the crisis would spread to other countries with shaky finances such as Spain and Portugal.

"We are going to defend the euro," said Salgado, who presided over the Brussels meeting.

"We have to give more stability to our currency ... We will do whatever is necessary" to reach agreement.
EU sources have said the measures could involve extending a euro50 billion financial support facility that has already been available to some EU nations outside of the eurozone and bringing the ceiling up to euro110 billion.
There also has been talk about a system of loan guarantees. Some economists have urged the European Central Bank to support the bond market by buying government bonds.

Bank President Jean-Claude Trichet said last week the bank did not discuss such a step at its Thursday meeting but stood ready to take unspecified additional measures if appropriate.

Ministers are pushing to have something approved by the time stock markets open Monday because vague promises have been unable to calm market turmoil over the past weeks.

"We need to make progress today because in the night, when the markets are opening, we cannot afford disappointments," said Swedish Finance Minister Anders Borg.

"We now see herd behaviors in the markets that are really pack behaviors, wolf pack behaviors," he said.

If unchecked, "they will tear the weaker countries apart. So it is very important that we now make progress."
Some eurozone nations blamed the fragile governments and a lack of European cooperation for the crisis.
"I'm against putting all the blame on speculation," said Austrian Finance Minister Josef Proell.

"Speculation is only successful against countries that have mismanaged their finances for years."
Fear of default led to investors demanding high interest rates that Greece could not pay, forcing it to seek a bailout; the risk is that market skepticism will make Portugal and Spain pay more and more to borrow, worsening their plight.

"We have to take decisions that will restore the stability of the euro, for the eurozone and we have to work on the mechanism which will be comprehensive and efficient to restore stability," said French Finance Minister Christine Lagarde.

Early Saturday, the eurozone leaders gave final approval for an euro80 billion ($100 billion) rescue package of loans to Greece for the next three years to keep it from imploding.

In Washington on Sunday, the board of the International Monetary Fund approved its euro30 billion ($40 billion) share of the bailout.

While EU finance ministers hashed out an agreement of their own, the approval by the IMF in Washington was enough to push the euro higher in early Asian and Pacific trading to $1.2893 from the $1.2731 it bought in New York on Friday.

IMF: Spartan Workout for Greece

This has roiled world equity markets for more than a week precipitating massive sell-out from Wall Street to Shanghai. Bursa was not spared in spite of its nascent growth lately.I do hope that this will stop the hemorrhaging.

There is welcome news form the International Monetary Fund today.It has put up nearly US$40 billion to help bail out Greece and appease investors' fears of a spreading European debt crisis.

Let us read the AP Report.

The IMF's executive board met in Washington Sunday to approve a three-year, euro30 billion loan for the debt-plagued nation, part of a $140 billion package (euro110 billion) negotiated with other eurozone countries.

With hundreds of billions in debts and a budget deficit of 13.6 percent of gross domestic product, Greece was just weeks away from default when eurozone finance ministers agreed to activate a rescue.
Greece has enacted tax hikes and deep cutbacks in government spending as a condition of the bailout.
The austerity measures have sparked riots and social unrest in the nation.

"The Greek government should be commended for committing to an historic course of action that will give this proud nation a chance of rising above its current troubles and securing a better future for the Greek people," IMF Managing Director Dominique Strauss-Kahn said.

"Today's strong action by the IMF to support Greece will contribute to the broad international effort under way to help bring stability to the euro area and secure recovery in the global economy," Strauss-Kahn said.

Eurozone leaders on Saturday approved a $100 billion package of loans to help keep Greece from imploding. Greece will have access to about $7.1 billion (euro5.5 billion) from the IMF on May 12, and will be able to tap a total of about $51.5 billion in combined IMF and EU funds this year.

Athens needed to see the first installment of loans before it is due to pay out about $11 billion (euro8.5 billion) on 10-year bonds that come due on May 19.

It had raised some cash on its own ahead of the looming bond payment, but not enough to cover the whole amount.

Together, the IMF and EU bailouts give Greece enough money to avoid having to raise private funds for two years, IMF officials said.

By that time, Greece hopefully will be strong enough economically to borrow through private debt markets, IMF deputy managing director John Lipsky said in a call with reporters Sunday.

Earlier attempts to stabilize the Greek economy failed to reassure jittery investors, Lipsky said.

He said Sunday's action sends a signal that "the international community is willing to do whatever it takes to help Greece's government overcome the severe challenges it's facing."

Eurozone ministers also are meeting Sunday to consider other measures aimed at stabilizing global markets that were rocked last week by fears that Greece's debt crisis will spread to other EU nations such as Portugal and Spain and hobble the global economic recovery.

Rushing to finalize an agreement before Asian markets officially open Monday, the ministers were discussing a defense plan for the embattled euro.

A proposed aid plan would have the EU Commission make euro60 billion ($75 billion) available while countries from the 16-nation eurozone and the IMF would promise to back bilateral loans and guarantees for up to euro440 billion ($570 billion).

EU sources say the ministers hope such a euro defense package would suffice to keep markets from targeting the eurozone's weaker members.

President Barack Obama continued pressing European leaders to craft a solution robust enough to stabilize markets after volatility last week that rivaled market swings during the peak of the 2008 financial crisis.
Obama called German Chancellor Angela Merkel and French president Nicolas Sarkozy on Sunday to discuss the importance of European Union nations "taking resolute steps to build confidence in the markets," said White House press secretary Robert Gibbs.

Well, would this allay stock market fears this week?