Investment Highlights

• NEUTRAL. We maintain our NEUTRAL view on the property sector. The Malaysian property sector has been experiencing a challenging time in the past three years, particularly for the residential property segment, mainly due to high property prices, stricter lending policies, volatile macroeconomic conditions and weak consumer sentiment. The last 12–18 months have seen some changes whereby the residential property market has been adjusting to mass-market affordable housing while developers have slowed down their launches and working hard to clear unsold units to reduce the overhang situation.

• Overall residential market still slow. Year to date, there are still no sign of recovery in the local residential property market as most developers under our coverage reported lower new sales YoY, during their recent quarterly earnings announcements. Only Sunway managed to achieve stronger new sales YoY, while IOI Properties Group’s (IOIPG) sales were similar to the previous year’s level with both developers being supported by strong take-ups in China and Singapore. We do not expect to see surprises in earnings for the next 12 months with the current local market condition.

On the bright side, developers are more aggressive in clearing unsold units by offering discounts and the inventory level is on a declining trend. We believe that this is a positive move to realise cash flow albeit at the cost to their profit margins.

Meanwhile, companies such as Mah Sing, Titijaya and EcoWorld will do slightly better in 2H as their new projects are entering matured stage, hence able recognise higher revenue. We expect UEM Sunrise (UEMS) to achieve stronger results in 2H following the completion of its Australian projects.

• Retail REITs still resilient. 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.

• Stable demand for industrial properties. Demand for industrial properties will be driven by the logistics and warehousing segments which are largely supported by the emergence of e-commerce. The preference for logistic warehouses will likely continue to be within the Klang Valley, largely in Shah Alam, where there is a large concentration of manufacturing activities and distribution centres.

• Oversupply on office sector. The outlook for the office sector will be negative in the medium term due to oversupply as 20mil sq ft of additional office space in Greater KL (presently 123mil sq. ft.) are targeted for completion in the next 3-4 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. Higher construction costs and weaker rents will put yields under pressure.

• IAS 23 Borrowing Costs issue. Developers are still assessing the effect on the change in the accounting policy, therefore it is still early to determine the real impact to earnings. Although initial rough estimates suggested the new approach will reduce the FY20–FY21 bottom line by between 10% and 20%, we are not making changes to our earnings forecasts at this juncture pending further information from the developers. As the new implementation is only a timing difference in recognising the borrowing costs and shall have no impact on cash flows, we are keeping our valuations unchanged.

• 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: RM1.95) 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 may upgrade our NEUTRAL stance for the property sector to OVERWEIGHT if: (1) banks are to ease lending policies on properties; and (2) consumer sentiment is to improve significantly.

We are keeping our NEUTRAL view on REITS given their high valuations and advise investors to buy on weakness.

Source: AmInvest Research - 16 Jul 2019