Investment Highlights

• Expecting lower property sales. With the movement control order (MCO) put in place from 18 to 31 March 2020, we expect a short-term negative impact on local property sales and retail REITs. Most developers are planning to defer their new launches. At the same time, they are also assessing the economic situation before deciding whether to revise their sales targets. Nevertheless, we believe there will be some spillover effects on local property sales as a result of the negative impact on the local economy. Hence we are revising our earnings forecasts to reflect the impact (Exhibit 2).
• Most developers are trading at a P/BV of 0.2x–0.4x, with the exception of Sunway (0.79x), whereby its property development business made up 24% of the group’s total profit. Based on historical numbers, Malaysian property developers traded in the range of 0.19x–0.8x in 1998 and 0.17x–0.85x in 2008 at their all-year low levels (Exhibit 3). At the current level of 0.2x–0.4x, we believe the stocks are trading at a discount to the 1998 and 2008 average low of around 0.5x. To remain prudent, we increase our discount to RNAV across the board to 60% from 50%. Nonetheless, should the economic condition and new sales recover in the future, we shall adjust our discount to RNAV back to 50%. Refer to Exhibit 2 for changes in fair values.

• Impact on REITs. We believe there will be a negative impact on Pavilion REIT (PREIT) and Sunway REIT (SREIT) whereby most of their properties are made up of shopping complexes. We reckon the spillover effects on local economy may drag the negative sentiment further. Therefore, we are revising our FY20 and FY21 earnings downwards by 15.8% and 15.5% respectively for PREIT and 13.0% and 13.4% respectively for SREIT. As for YTL REIT, the properties in Malaysia and Japan are under master leases, hence they shall remained stable. Nonetheless, we cut its FY20 and FY21 by 12.6% and 10.9% respectively to reflect the lower earnings from its Australian properties due to Covid-19 and its effect to the global economy.
• Overall, we expect the outlook for retail properties to remain stable in the longer 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.

• 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 its diversified income base; and (2) IOIPG (FV: RM1.54) which is banking on the property development projects in China. We also maintain our BUY recommendation on SREIT (FV: RM1.88), YTL REIT (FV: RM1.43), Mah Sing (FV: RM0.80) and UEMS (FV: RM0.49).

Source: AmInvest Research - 19 Mar 2020