Investment Highlights

• 4QCY19 results largely in line. The results of the companies under our coverage are largely in line. Out of the 13 companies under our coverage, 8 came in within expectations, 2 were below expectations and 3 above expectations (Exhibit 2).

o For property developers, IOI Properties Group (IOIPG), Mah Sing, MRCB, S P Setia, Sunway and Titijaya and came in within expectations while the results of Eco World Development Group (EcoWorld), UEM Sunrise (UEMS) and Enra were higher than expected.

o EcoWorld’s FY10/19 earnings were mainly contributed by its projects in the Klang Valley (RM2.0bil), Iskandar Malaysia (RM939.5mil), and the remaining RM209.4mil in Penang. IOIPG’s 1HFY6/20 earnings of RM363.3mil (-3.5% YoY) were mainly contributed by development projects in China, and a higher share of profit in joint ventures arising mostly from the sale of South Beach Residences in Singapore. Enra’s stronger-than-expected 1HFY6/20 earnings were mainly due to lower investment holding costs. UEMS registered its FY19 core net earnings of RM278.2mil (-14.2% YoY), largely derived from its Australian projects and local projects in the central region.

o Sunway reported stronger FY19 earnings of RM638.2mil (+16.5% YoY) attributed mainly to higher profit recognition and progress billings from local and China development projects; and a strong performance in the healthcare segment. S P Setia’s FY19 core net earnings grew by 8.0% YoY mainly contributed by the sale of the British Embassy land and ongoing projects.

o Mah Sing (-29.9% YoY) and Titijaya (-77.1% YoY) posted lower quarterly earnings YoY as their projects are still in the early stages. However, we expect them to recognise stronger revenue in the coming quarters once the projects pass the initial stages of construction. Meanwhile, MRCB’s FY19’s earnings dived by 76.5% YoY mainly due to lower revenue recognised during the period as a result of the deferment and retiming of income recognition from the LRT3 project.

o Despite a stronger performance YoY, SimeProp’s FY19 core net profit of RM312.0mil (+94.5% YoY) came in below expectations. Its profit mainly came from projects at Denai Alam, Bukit Jelutong, Nilai Utama, Bandar Bukit Raja, Serenia City and Putra Heights Township, KLGCC Resort and Cantara Residences.

• New sales YoY generally lower. Developers generally reported lower new sales YoY, by about 6.8%, due to the slower market condition. 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. However, we believe that this is a positive move to realise cash flow.

• REITs still resilient. For REITs, Pavilion REIT (PREIT) and Sunway REIT (SREIT) came in within expectations. PREIT registered lower earnings of RM258.3mil (-3.1%) mainly due higher finance costs. SREIT’s 1HFY6/20 earnings grew by 4.5% YoY mainly attributable to the contribution from the newly acquired Sunway University & College campus and stronger performance across all segments, particularly hotels. YTL Hospitality REIT’s (YTL REIT) 1HFY6/20 earnings came in below expectation mainly due to weakening of the AUD against the MYR. We expect the outlook for retail properties, especially shopping malls, to remain stable in the medium term. Shopping malls and hotels are poised to gain from the recent stimulus measures with a 15% discount in monthly electricity bills for six months from April until September 2020, while at the same time shopping malls are also encouraged to reduce rentals of their tenants and hotels to offer discounts to customers. We reckon the impact to our retail and hospitality REIT players to be minimal as we believe that the hotel and shopping mall players will be able to manage the reduction in cost and revenue efficiently.

• Maintain NEUTRAL. 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 (FV: RM2.07) 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 (FV: RM1.73) which is banking on the strong contribution from its property development projects. We maintain our BUY recommendation on SREIT (FV: RM2.16), YTL REIT (FV: RM1.63), Mah Sing (FV: RM1.00) and UEMS (FV: RM0.80). We upgrade MRCB (FV: RM0.58) to HOLD from UNDERWEIGHT as it has reached our FV following the recent selldown. 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.

Source: AmInvest Research - 4 Mar 2020