Investment Highlights

• We maintain our NEUTRAL stance on the property sector as we are cautious due to:
  1) heightened prospect of a stagflation due to the Russia-Ukraine conflict which has driven up global commodity prices amid prolonged supply chain disruptions. This could depress housing demand while raising construction costs and compress development profit margins; and
  2) banks remaining cautious in residential property lending as reflected in the low loans applied/approved ratio of 35% compared to 51%–53% during the 2011–2014 uptrend cycle (Exhibit 3).
  However, there are several encouraging signs from developers under our coverage last year include:
  1) ambitious landbanking activities in prime areas with good public infrastructure and connectivity to the KL city centre; and
  2) the exemption of real property gains tax (RPGT) for house sales starting from the sixth year of purchase (previously taxed at 5%) under Budget 2022.

• Mixed YoY and QoQ results. The 4QFY21 performance of 7 companies under our coverage was mixed as 2 were in line with our forecasts, 3 underperformed and 2 outperformed. Except for UEM Sunrise (UEMS), most of the developers’ FY21 results returned to the black, registering improvement in their bottom lines following the easing of containment measures under the National Recovery Plan in 4Q2021 (Exhibit 2). Here’s a look at the companies’ performance:
  • The core net profit of Sunway and IOI Properties Group (IOIProp) was within expectations. As a conglomerate, Sunway’s revenue rose by over 12% YoY in all segments except its property investment division, which remained hobbled by the pandemic. Meanwhile, IOIProp registered revenue growth in all business segments.
  • Lagenda Properties missed earnings expectations due to slower-than-expected revenue recognition. Mah Sing Group’s earnings were a miss due to its glove business’ lower-than expected utilisation rate. However, its FY21 property segment remained strong with a 13% YoY growth. UEMS also fell short of forecasts as a result of rising raw material costs and inventory impairments.
  • Sime Darby Property’s (SimeProp) earnings beat expectations with impressive sales of RM3bil, which exceeded management’s own sales target of RM2.4bil by 25%. Similarly, S P Setia also outperformed with a sales performance that beat its own target by 12%.
  • QoQ, Lagenda, Sunway and IOIProp posted strong 4QFY21 earnings growth. Meanwhile, SimeProp and S P Setia returned to the black as development activities regained momentum post-MCO 3.0.
    However, Mah Sing recorded weaker QoQ results due to the recognition of lumpy cost provision write-backs from the completion of construction contracts in 3QFY21. The worst performer was UEMS, which incurred a wider loss due to gross profit margin compression and higher provision for inventory impairments.
• Encouraging FY2021 new sales. Thanks to the Home Ownership Campaign (HOC), digital marketing initiatives and new launches, developers under our coverage registered a commendable 37% YoY growth in new sales (Exhibit 2). For FY22F, most developers are setting conservative sales targets (lower than FY21 actual sales) likely due to the expiration of the HOC. However, Mah Sing and Lagenda, which focus on affordable housing developments, are setting higher sales targets in anticipation of pent-up demand in this market segment.
• Potential rise in residential demand following the reopening of borders... Moving forward, we foresee a gradual recovery in property transaction volumes, especially in the residential segment with the reopening of international borders on 1 April 2022 and the resumption of international trade and travel given the relative regional affordability of Malaysia’s developments, notwithstanding stricter criteria for the Malaysia My Second Home programme.

• … mitigated by a growing risk of stagflation. The geopolitical risks posed by the Russia-Ukraine conflict are likely to intensify inflation and recessionary concerns, resulting in potentially lower disposable income amid higher unemployment rates. Under the current climate of uncertainty, potential house buyers may adopt a wait-and-see approach that could depress residential demand and cause a stagnation in house prices.

• Potential hike in overnight policy rate (OPR). According to our in-house projection, BNM is expected to raise the OPR by 1–2 times in 2H2022 with 25 basis points for each hike in a move to maintain the interest rate differential between the US and Malaysia at around 175–225bps. The potential rate hikes could have a negative impact on consumer sentiment and purchasing power, dampening overall demand for properties. Nevertheless, we believe the impact will be manageable because the OPR is likely to remain low in comparison to pre-Covid levels.

• Our top pick for the sector is Sunway given the strong brand recognition established by its highly successful landmark developments and expanding healthcare business, supported by substantive unbilled sales and outstanding order book.

Source: AmInvest Research - 15 Mar 2022