Investment Highlights

• We maintain our NEUTRAL view on the property sector. The past three years have been challenging for the Malaysian property sector, particularly residential property, mainly due to high property prices, stricter lending policies, volatile macroeconomic conditions and weak consumer sentiments. For the past 12-18 months, the residential property market has been adjusting to the mass-market affordable housing, where the true demand is, while developers have begun to reduce prices to clear unsold units. While the government’s effort to remove/reduce stamp duty and explore innovative funding options like crowdfunding and peer-to-peer (P2P) lending brings some hope in improving buyers’ sentiment, we believe the local residential property market still lacks major catalysts such as strong GDP growth and easing of lending policies to turn the tide.

• We do not expect to see surprises in the earnings for the next 12 months as properties are not fast-moving goods and will take some time to recover. Despite positive numbers of new sales recorded by developers up to 9MFY18, these numbers will take at 2-3 years to be fully recognized in terms of revenue (except for fully completed units).

• Developers are more aggressive in clearing inventories by offering discounts. We see this as a win-win situation as it will help to improve the affordability of the properties while at the same time, developers can realise cash flow from these inventories (despite lower margins), thus providing them huge savings on financing costs and clear the overhang situation.

• Meanwhile, the outlook for the office sector is negative in the medium term due to oversupply as 20mil sq ft of additional office space in Greater KL (presently, office space stands at 123mil sq. ft.) such as The Exchange @ TRX, Lot 91 Project, Tradewinds Square, PNB 118 and Cititower are targeted for completion in the next four years while market absorption remained lagged. KL City will experience the greatest impact, with 9.7mil sq. ft. scheduled for completion in the next 3-4 years. Yields are under pressure as a result of higher construction costs and weaker rents.

• For REITs, the outlook for retail properties, mainly shopping malls, remains resilient in the short to medium term. This is demonstrated by REITs under our coverage, namely Pavilion REIT (HOLD, FV: RM1.60) and Sunway REIT (HOLD, FV: RM1.68) whereby both have high occupancy rates in their shopping malls. The high occupancy rates are also due to strong management and brand names of the REITs; and shopping complexes becoming a one-stop centre for Malaysian lifestyle providing F&B and entertainment.

• We may upgrade our NEUTRAL stance for the property sector to OVERWEIGHT if: (1) the banks are to ease lending policies on properties; or (2) consumer sentiment is to improve significantly.

• We may downgrade our NEUTRAL stance for the property sector to UNDERWEIGHT if: (1) the banks are to tighten further their lending policies on properties; or (2) consumer sentiment is to deteriorate further.

• We tweaked MRCB’s (HOLD) FV to RM0.79 from RM0.83 given a lower PER valuation for its construction segment following a downgrade in our construction sector. We also revised Eco World Development’s (HOLD) FV to RM1.13 from RM1.30 with a higher discount on RNAV of 45% from previously 40%.

• Our top picks for the sector are: (1) Sunway Bhd (BUY, FV: RM1.65) given that its local property launches have been generally well received due to good locations, and diversified income based; (2) E&O (BUY, FV: RM2.01) for its prime landbank, including reclamation rights on the Penang Island, strong take-up rates for new property launches and the ability to clear unsold units; and (3) Mah Sing (BUY, FV: RM1.21) for its quick turnaround property development model, increasing exposure in the affordable segment (>70%) and recording good take-up rates.

• Our top pick for the REIT sector is YTL REIT (BUY, FV: RM1.35) as it offers a proxy to the vibrant hospitality industry in Australia (under the Marriott brand name) and an attractive yield of >6% (stable with >50% NPI backed by master leases).

Source: AmInvest Research - 2 Jan 2019