Investment Highlights

• It takes time for economy to regain momentum. The Covid-19 breakout has caused a major upheaval in the global economy. Malaysia’s movement control order (MCO) which was put in place from 18 March to 14 April 2020 has put the economy in a pause for almost a month. With the MCO ending in mid-April, the economy may take a while to regain its momentum. Our in-house economist expects the Malaysian economy to fall into a technical recession in 2020, trimming Malaysia’s 2020 GDP forecast to 0.4% from 3.0% while increasing 2021’s growth to 4.85% from 4.5%.

Weak consumer sentiment. Most developers are still assessing the economic situation, and deliberating whether to continue or defer future launches. We believe consumer sentiment shall remain weak for the time being with spending mainly focused on necessities while big-ticket items such as properties take a back seat. Nevertheless, developers under our coverage have reasonable amount of unbilled sales, hence they shall remain profitable in FY20–FY21. To remain prudent, we are lowering our assumptions on their sales target, and cutting our earnings forecasts to reflect the impact from lower sales and the timing of revenue recognition (Exhibit 2).

Cautious on gearing. We remain cautious on the financial leverage of companies as it is one of the key factors to their survivability during an economic downturn. Based on our data, the net gearing of developers under our coverage is still under control with net gearing averaging at about 36% while interest coverage remains strong at circa 8x (Exhibit 1). EcoWorld has the highest net gearing at 73.5% with a manageable interest coverage of 3.2x followed by Crest Builder’s 66.3%. Nonetheless, the bulk of Crest Builder’s borrowings is used to finance its concession business where the payment receipts are guaranteed by the government. Excluding the concession borrowings, the company is in a net cash position.

Deep valuations. Most developers are trading at a P/BV of 0.2x–0.4x, with the exception of Sunway (0.88x), whereby its property development business makes 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, the stocks are trading at a discount to the 1998 and 2008 average low of around 0.5x. If the current economic condition persists, we believe property developers will still trade at their current P/BV levels. However, we will reduce our discount to RNAV when the economic conditions and new sales improve in the future.

• A challenging near-term outlook for retail/hospitality REITs. Retail REIT managers are adopting a proactive stance in supporting their tenants through this difficult time. In our previous sector report dated 19 March 2020, we have reduced the retail REITs earnings forecasts for FY20–FY21 by about 15% respectively to reflect the impact of the MCO and its spillover effects to the economy which may result in lower rental income. As the economy may take some time to regain its momentum, we believe the impact to the bottom line will be felt for at least several months. Hence, we are revising our FY20-FY21 earnings downwards by a further 5% (Exhibit 2) by assuming a lower rental rate. For YTL REIT, its properties in Malaysia and Japan are under master leases. Hence it will remain stable. Nonetheless, we cut its FY20 and FY21 by a further 5% each to reflect the lower earnings from its Australian properties due to the Covid-19 outbreak and its impact to the global economy.

• Time for “national service". Although companies are facing tough times due to the Covid-19 pandemic, they did not forget corporate social responsibility. Sunway Group has rolled out more than RM34mil to help Malaysians cope with the pandemic, Sunway Malls has granted rental waiver worth RM20mil to all non-essential trade retailers across its seven malls to help tenants weather through this difficult time. S P Setia has pledged RM1mil to the GLC/GLIC Disaster Relief Network for the Ministry of Health (MOH), and also donated 2 ventilators to Hospital Selayang. Meanwhile, Sime Property Group (SimeProp) has contributed RM500K cash to the GLC Relief Fund Network, RM350K cash to MERCY via Yayasan Sime Darby, and RM200K worth of personal protective equipment (PPE) to the University Malaya Medical Centre. All available SimeProp show units are opened for frontliners who require isolation. Mah Sing has donated 20 units of heavy-duty critical-care ventilators worth RM3.9mil to the National Disaster Management Agency (NADMA), which will be distributed to hospitals in need. MRCB is channelling RM500K to the MoH in the form of essential and urgent medical supplies such as PPE and ventilators. UEM Sunrise has donated RM200K to purchase PPE for medical frontliners in KL, Selangor and Johor. Crest Builder, together with its friendly parties, have donated medical supplies worth over RM200K to Hospital Selayang. EcoWorld has contributed RM100K to The Edge Covid-19 Equipment Fund via EcoWorld Foundation.

• Maintain NEUTRAL. We maintain our NEUTRAL view on the sector as the overall sentiment remains weak. Our top picks for the sector are: (1) Sunway Bhd (FV: RM1.81) given its diversified income base; and (2) IOIPG (FV: RM1.52) which is banking on its property development projects in China. We also maintain our BUY recommendation on SREIT (FV: RM1.82),

YTL REIT (FV: RM1.36), Mah Sing (FV: RM0.79), UEMS (FV: RM0.48) and Crest Builder (FV: RM1.76).

Source: AmInvest Research - 9 Apr 2020