Investment Highlights

• 1QFY19 results largely in-line. The results of the companies under our coverage are largely in-line as out of the 12 companies under our coverage, 7 came in within expectations, 1 above expectations and 4 below expectations (Exhibit 2). For property developers, IOI Properties Group (IOIPG) came in above expectation with strong contributions from projects in China and higher earnings from JVs arising from the sale of South Beach Residences in Singapore. Eco World Development Group (EcoWorld), Mah Sing Group, S P Setia, Sunway and UEM Sunrise came in within expectations while MRCB, Sime Darby Property (SimeProp) and Titijaya Land (Titijaya) were lower than expected. Mah Sing (-20% YoY) and Titijaya (-50% YoY) registered lower earnings YoY as their projects are still at early stages and we expect them to recognise stronger revenue in the coming quarters once their projects pass the initial stages of construction. Meanwhile, MRCB’s 1QFY19’s earnings plunged by 80.8% mainly due to lower revenue recognised during the period as a result of the deferment and retiming of income recognition from the LRT3 project.

• New sales YoY generally lower. Sunway (+58% YoY) and SimeProp (+57% YoY) managed to achieve stronger new sales YoY while IOIPG’s sales were similar to the previous year’s level. Other developers generally reported lower new sales YoY. Hence, we do not expect to see surprises in earnings for the next 12 months. Developers are more aggressive in clearing unsold units by offering discounts whereby inventory level is on a declining trend. We believe this is a positive move to realise cash flow.

• Retail REITs still resilient. For REITs, Pavilion REIT (PREIT) and Sunway REIT (SREIT) came in within expectations while YTL Hospitality REIT’s performance (YTLREIT) was below expectations. YTLREIT registered lower earnings mainly due to its Australian properties as a result of a refurbishment exercise at the Brisbane Marriott and a weakening AUD against the MYR. We expect the outlook for retail properties, especially shopping malls, to remain stable in the short to medium term. This is demonstrated by PREIT (HOLD, FV: RM1.81) and SREIT (HOLD, FV: RM1.87) whereby both have high occupancy rates in their shopping malls. We believe the high occupancy rates are also due to strong management and brand names of the REITs, in addition to shopping complexes becoming one-stop centres for the Malaysian lifestyle providing F&B and entertainment options.

• We may upgrade our NEUTRAL 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.

• Maintain NEUTRAL on the sector. We maintain our NEUTRAL view on the property sector as we do not anticipate earnings surprises in the short to medium term. Our top picks for the sector are: (1) Sunway Bhd (BUY, FV: RM1.94) given that its local and overseas property launches have been generally well received due to good locations, and diversified income base; and (2) IOIPG (BUY, FV: RM1.89) which is banking on a strong contribution from its property development projects, particularly in China and Singapore. We are keeping our NEUTRAL view on REITS given their high valuations and advise investors to BUY on weakness.

Source: AmInvest Research - 11 Jun 2019