Investment Highlights

• 3QCY20 results largely below expectations. The results of the companies under our coverage are largely below expectations. Out of the 8 companies, 6 came in below expectations while 2 was in line (Exhibit 2).

1. For property developers, IOI Properties Group (IOIPG) is the only one whose profit came in within expectations while the results of Crest Builder, Mah Sing, MRCB, SimeProp and S P Setia were lower than expected.
2. IOIPG’s property development segment recorded a 1QFY21 EBIT of RM265mil (+31% YoY) mainly due to stronger contribution from projects in Malaysia and China. All in all, the property development division chalked up new sales of RM473mil vs. YoY’s RM390mil whereby 49% was derived from Malaysia and 51% from China while its unbilled sales stood at RM696.8mil as compared to QoQ’s RM607mil. Meanwhile in Singapore, the construction progress of Central Boulevard development has resumed since August 2020 and the management is planning to catch up on lost time brought about by the circuit breaker that was imposed in April 2020.
3. Meanwhile, all companies posted lower earnings or made losses 3QCY20 (Exhibit 2) mainly due to slower recognition as a result of the movement control order (MCO) related to the Covid-19 pandemic. Mah Sing, S P Setia and SimeProp have many projects that are ere still in their early stages, hence revenue recognition in 9M was lower compared with the previous year’s. MRCB reported a 9MFY20 core net loss of RM0.5mil vs. a net profit of RM17.4mil YoY attributed to deferments in construction works and progress billings.
4. S P Setia and SimeProp registered 9MFY20 net losses of RM376.5mil and RM422.9mil respectively mainly on impairment of inventories in the Battersea project. Stripping the exceptional items, S P Setia and SimeProp’s 9MFY20 core net earnings came in at RM102.2mil and RM52.4mil respectively.

• New sales YoY generally lower. Developers generally reported lower new sales YoY, by about 22% (Exhibit 2), due to the lacklustre market and the impact of the MCO and Covid-19 pandemic. 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. We believe that this is a positive move to realise cash flow.
• Consumer sentiment still weak. Most developers remain cautious, and are still assessing the economic situation before deciding to continue or defer future launches. We believe that consumer sentiment shall remain weak for the time being with spending mainly focused on necessities while big-ticket items such as properties will take a back seat for now.
• Expect stronger performance in 4Q. 9M20 earnings were mainly weighed down by the MCO and the Covid-19 pandemic. Nevertheless, developers under our coverage have reasonable amount of unbilled sales (Exhibit 2). Also, with the resumption of business activities and construction work, we expect to see stronger recognitions in 4Q20.
• REITs under pressure. Retail REIT managers are adopting a proactive stance in supporting their tenants through this difficult time. Pavilion REIT (PREIT) registered lower earnings of RM83.5mil (-57.4%) mainly due to the rental rebates given to tenants whose businesses were not of essential services during the MCO and CMCO, lower occupancy due to non-renewal of some expired tenancies and also deferment of rent commencement date for some tenants, as well as lower percentage of rent and advertising revenue. YTL Hospitality REIT’s (YTL REIT) lower earnings were mainly due to Covid-19 pandemic, rental deferment for properties in Malaysia and Japan, and a weaker performance from properties in Australia.
• Maintain NEUTRAL. We retain our NEUTRAL view on the sector as we do not anticipate earnings surprises in the short to medium term. We have BUY calls on (1) IOIPG (FV: RM1.54) which is banking on the strong contribution from its property development projects; and (2) Mah Sing (FV: RM1.50), underpinned by the strong take-up rates of its recent launches and its upcoming rubber glove business. We maintain BUY on PREIT (FV: RM1.84) and YTL REIT (FV: RM1.26).

We may upgrade our 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 - 3 Dec 2020