Investment Highlights

• Maintain NEUTRAL. We are maintaining our NEUTRAL view on the property sector as the outlook remains challenging in the next 12 months. 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 12 May 2020 has put the economy in a pause for almost two months. Most developers are still assessing the economic situation, and deliberating whether to continue or defer future launches. We believe consumer sentiment remains weak for the time being with spending mainly focused on necessities while big-ticket items such as properties take a back seat.

• Developers shall remain profitable but cautious on gearing. Developers under our coverage have reasonable amount of unbilled sales, hence they shall remain profitable in FY20–FY21. Companies such as S P Setia, MRCB, Ecoworld, Titijaya Land and UEM Sunrise have many projects still in their early stages, hence we do not expect strong revenue recognition in the next 12 months. On the other hand, we remain cautious on the financial leverage of some 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, averaging at about 36% while interest coverage remains strong at circa 8x. Crest Builder has the highest net gearing at 92% followed by Ecoworld’s 67% and S P Setia’s 60%. Nonetheless, the bulk of Crest Builder’s borrowings is used to finance its concession business where payment receipts are guaranteed by the government. Excluding the concession borrowings, the company is in a net cash position.

• Affordable segment remains the key focus. We expect the affordable segment to perform better, driven by its mass market, especially demand 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.

• Positive impact from Penjana stimulus plan. The reintroduction of home ownership campaign with stamp duty exemption to purchase residential properties priced RM300K–RM2.5mil and the exemption of real property gain tax (RPGT) for Malaysians on the disposal of residential properties made from 1 June 2020 to 31 December 2021 are positive news for developers. These key measures will improve the overall sentiment of house buyers and the residential property market in Malaysia. 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 pick for the sector is IOI Properties Group (BUY, FV: RM1.52) which is banking on a strong contribution from its property development projects, particularly in China and Singapore. IOIPG is planning to launch its Xiamen 2 project progressively in May 2020. The anticipated GDV for Xiamen 2 is approximately RMB800mil comprising high-rise residential (GDV – RMB600mil) and landed residential (GDV – RMB200mil). Meanwhile, Xiamen 3 is scheduled for launching in the later part of CY2020.

• We view the long-term outlook for REITs to be positive given the diminishing rate of Covid-19 infections in Malaysia while several stimulus plans by the government provide greater earnings visibility. Furthermore, Malaysian REITs’ dividend yields of more than 4% on average for FY20 and more than 5% for FY21 and beyond, offer attractive returns compared to the current low interest rate environment. We have BUY recommendations on Pavilion REIT (FV: RM1.99) and YTL Hospitality REIT (FV: RM1.36).

• We may upgrade the property sector to OVERWEIGHT if: (1) the banks are to ease lending policies on properties; or (2) consumer sentiment is to improve significantly.

• We may downgrade our NEUTRAL stance for the property sector to UNDERWEIGHT if: (1) the banks are to tighten further their lending policies on properties; or (2) consumer sentiment is to deteriorate further.

Source: AmInvest Research - 20 Jul 2020