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AmInvest Research Reports

Author: AmInvest   |   Latest post: Fri, 27 Nov 2020, 10:59 AM

 

Property & REIT - After a Near-stagnant 2Q20; Expect Strong Rebound in 2H

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Investment Highlights

  • 2QCY20 results largely below expectations. The results of the companies under our coverage are largely below expectations. Out of the 10 companies, 7 came in below expectations while 3 were in line (Exhibit 2).
    • For property developers, IOI Properties Group (IOIPG), MRCB and UEM Sunrise (UEMS) were within expectations while the results of Eco World Development Group (EcoWorld), Crest Builder, Mah Sing, SimeProp and S P Setia were lower than expected.
    • Despite making losses in other divisions, IOIPG’s property development segment recorded an FY20 EBIT of RM813.5mil (+22.2% YoY) mainly due the operating profit contribution from its China operation arising from the sale of the recently launched high-rise condominium in IOI Palm City, Xiamen. That brought the group’s total core net profit to RM603.1mil for FY6/20.
    • All companies posted lower earnings or losses 2QCY20 (Exhibit 2) mainly due to slower recognition as a result of the movement control order (MCO) related to the Covid-19 pandemic. Meanwhile, Mah Sing, S P Setia, and UEM Sunrise have many projects still in their early stages, hence revenue recognition in 1H was lower compared with the previous year’s.
  • New sales YoY generally lower. Developers generally reported lower new sales YoY, by about 31% (Exhibit 2), due to the lacklustre market and the impact of the MCO. Hence, we do not expect to see surprises in earnings over the next 12–18 months. Developers are more aggressive in clearing unsold units by offering discounts with the inventory level on a declining trend. We believe that this is a positive move to realise cash flow.
  • Consumer sentiment still weak. Most developers remain cautious, and are still assessing the economic situation, before deciding to continue or defer future launches. We believe that consumer sentiment shall remain weak for the time being with spending mainly focused on necessities while big-ticket items such as properties take a back seat.
  • Expect stronger performance in 2H. 1H20 earnings were mainly weighed down by the MCO and the Covid-19 pandemic. Nevertheless, developers under our coverage have reasonable amount of unbilled sales (Exhibit 2). Also, with the resumption of business activities and construction work, we expect to see stronger recognitions in 2H20.
  • REITs under pressure. Retail REIT managers are adopting a proactive stance in supporting their tenants through this difficult time. Pavilion REIT (PREIT) registered lower earnings of RM49.1mil (-63.4%) mainly due rent rebates from April 2020 to June 2020 given to tenants of non-essential services and supplies; and lower income from car park and advertisements. YTL Hospitality REIT’s (YTL REIT) lower earnings were mainly due to weaker revenue from its Australian properties as a result of travel restrictions which have impacted the tourism and hospitality business in the country. YTL REIT has also proposed rental variation to tenants which will result in the deferment of distributions to unit holders for a longer period. However, unit holders will see a spike in distribution in FY23 when the repayment begins.
  • Maintain NEUTRAL. We retain our NEUTRAL view on the sector as we do not anticipate earnings surprises in the short to medium term. We have BUY recommendations on (1) IOIPG (FV: RM1.52) which is banking on the strong contribution from its property development projects; and (2) Mah Sing (FV: RM1.01), underpinned by the strong take-up rates of its recent launches. We maintain BUY on PREIT (FV: RM1.91) and YTL REIT (FV: RM1.26). We may upgrade our stance for the property sector to OVERWEIGHT if: (1) banks are to ease lending policies on properties; or (2) consumer sentiment is to improve significantly.

Source: AmInvest Research - 3 Sept 2020

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