Investment Highlights

• Maintain NEUTRAL. We are maintaining our NEUTRAL view on the property sector as the outlook remains challenging in the next 12 months. While developers have achieved their new sales target, the numbers were lower whereby 1H2019 sales were lower by 10% to 15% as compared with the previous year. We do not expect surprises in earnings for the next 12 months as properties are not fast-moving goods and the sector will take some time to recover.

• Higher risks. The prolonged US-China trade tensions and a mounting global recession risk have triggered a selldown in global equity markets, including Malaysia's. Moreover, the UK property market has weakened significantly as Brexit uncertainty puts off buyers. We are raising the discount to RNAV by 5% to reflect the heightened risks. We are also extending the timing of recognition for projects in view of the slower market, particularly those located in the UK due to the Brexit risk. We make no changes to our FY19–21 earnings forecasts, but higher discounts and the lengthening of the timing of recognitions will lead to lower valuations and downgrades in recommendations (Exhibit 2).

• Still some space for growth. Nevertheless, we expect certain segments to outperform in the current market condition. We believe developers with overseas exposures will do better in the medium term, especially in China and Singapore. Sunway (FV: RM1.97) and IOIPG (FV: RM1.73) are well positioned in this area and their property launches have been generally well received both locally and overseas.
• Affordable segment remains bright. We expect the affordable segment to perform well, driven by resilient demand, especially from young professionals and families due to continued urbanisation. This is well reflected by the move by the majority of local property developers to focus on this segment. We like Mah Sing (FV: RM1.13) for its quick turnaround strategy. Year to date, Mah Sing has acquired 3 parcels of prime land in KL for development targeted towards the affordable segment at strategic locations with starting prices below RM500K.
• Retail REITs still resilient. We expect the outlook for retail properties, especially shopping malls, to remain stable in the short to medium term. Pavilion REIT (TP: RM1.93) and Sunway REIT (TP: RM1.97) are still enjoying 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.

• Maintain NEUTRAL on the sector. We maintain our NEUTRAL view on the 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: RM1.97) given that its local and overseas property launches have been generally well received due to good locations, and its diversified income base; and (2) IOIPG (BUY, FV: RM1.73) 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; or (2) consumer sentiment is to improve significantly.

• We are keeping our NEUTRAL view on REITS given their high valuations, and see buying opportunities on weakness.

Source: AmInvest Research - 6 Sept 2019