AmInvest Research Reports

Property - Attractive valuation with improving outlook

Publish date: Thu, 22 Dec 2022, 09:26 AM
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Investment Highlights

  • Remain OVERWEIGHT on property sector. Notwithstanding various negative headwinds in the property sector (increased building material costs, labour shortages and rising interest rates), we think current depressed valuations have already been priced in the downtrend commencing early April 2022. With the gradual easing of building material costs and labour shortages, we believe the current Kuala Lumpur Property Index’s price-to-book value (P/BV) of 0.4x is appealing vs. the 10-year average/median of 0.7x and pre-pandemic (2018–2019) average of 0.5x (Exhibit 2).
  • Building material costs reached its peak in 2QCY22. We believe most building material costs have reached their peaks in 2QCY22 following the easing of supply chain disruptions, coupled with the tightening of monetary policy by the Federal Reserve. Steel price in Central Peninsula slid 28% to RM3,132/MT in Oct 2022 from a peak of RM4,344/MT in Apr/May 2022 (Exhibit 3). With the stabilisation of building material costs, we believe developers will scale up their new property launches in 2023 as compared to 2022. In 3QCY22, we have seen developers including UEM Sunrise, S P Setia and Mah Sing increasing the number of new launches as compared to 1HCY22 due to more stable building material prices. In addition, we believe the increased building material cost for new projects could be mitigated through the adoption of industrialised building system (IBS), bulk purchasing and value re-engineering.
  • Gradual easing of labour shortages. Based on our recent meetings with developers, we understand that foreign workers are arriving in phases and worker constraints are expected to be gradually ease in 2023. At early December 2022, there are a total of 1.4mil foreign workers with a temporary work pass in Malaysia. For reference, the number of total foreign workers in Malaysia was 1.8mil before Covid-19 pandemic. From Jan 1 to Dec 4 2022, the Immigration Department approved 373,459 out of 403,869 applications to bring in foreign workers via visa with reference and the remaining 30,410 applications being processed. We anticipate the return of foreign labour to accelerate the construction progress of ongoing projects, which will subsequently improve developers’ recognition of progress billing in 2023.
  • Overnight policy rate (OPR) to be normalised in 2023. Our in-house economist is anticipating Bank Negara Malaysia (BNM) to raise its OPR by another 25bps in the next meeting in January 2023, pushing the OPR to 3.00%. This will bring interest rates to pre-pandemic level. Based on our sensitivity analysis, monthly installments for a property purchased at RM500,000 with 90% loan financing will increase by RM66–69 or 3.3%–3.5% for every 25bps hike. While the interest rate hike will dampen consumer sentiments, we believe Malaysia is coming to the tail end of the rate hike cycle. In addition, weaker consumer sentiment could be mitigated by still relatively firm economic growth and employment outlook following the reopening of international borders.
  • Premium Visa Programme (PVIP) benefits luxury properties. On 1 Sep 2022, Malaysia introduced the PVIP to attract wealthy foreigners to invest and reside in Malaysia for 20 years. Eligible foreigners must have an offshore income of at least RM40,000/month and a fixed deposit of at least RM1mil. The PVIP is well received with 20,000 applications from agents on launching day. We view this as a plus for the Malaysian real estate market, particularly for developers like Setia, UEMS and SimeProp, that focus on high-end residential units.
  • Stamp duty exemption under i-MILIKI to boost affordable properties. Under i-MILIKI, first-time homebuyers can enjoy a stamp duty waiver for properties priced at RM500,000 and below. In the previously tabled Budget 2023, the government has proposed to raise stamp duty exemption incentive to 75% from 50% for housing units priced above RM500,000 to RM1mil. We see these moves benefiting a majority of developers under our coverage as the mix of their property developments are largely skewed towards prices below RM1mil.
  • Key risks for the sector: i) Stagflation which could lead to higher unemployment alongside accelerated inflation, posing downside risk to property demand; ii) a potential new wave of the pandemic, which could disrupt business operations and construction progress; and iii) any prolonged or worsening of supply chain disruptions, which will impact the pace of economic recovery and heighten the cost of building materials.
  • More developers are embracing ESG practice in operations and products. To reduce carbon emissions, we have seen a growing trend among developers to incorporate north-south orientations in building design to lessen thermal heat gain, thereby lowering the energy required to cool buildings. Developers also place a strong emphasis on water-efficient fittings and rainwater harvesting systems in projects to optimise water consumption. On the social front, developers also support the government’s effort in developing affordable projects, including Rumah Selangorku (RSKU), Rumah Mampu Milik Wilayah Persekutuan (RUMAWIP) and Rumah Mampu Milik Johor (RMMJ). As one of our ESG top picks, Sunway is targeting zero carbon emission by 2050 and has incorporated sustainable financing consideration into capital management strategies via the issuance of sustainability-linked bonds.
  • Key considerations for downgrading the sector to NEUTRAL: i) worsening of labour shortages; ii) higher-than-expected building material costs; and iii) further deterioration in consumer sentiments.
  • Our top BUY is Sunway (FV: RM2.29) given strong brand recognition established by its highly successful landmark developments and expanding healthcare business, supported by substantive unbilled sales and outstanding order book. We favour Lagenda (FV RM1.64) for its focus on underserved and affordable landed housing developments in second-tier states with a large population of B40 and M40 income groups. We also like Mah Sing (FV RM0.86) for its strength in affordable housing developments at strategic locations as well as savvy execution and its quick-turnaround business model.


Source: AmInvest Research - 22 Dec 2022

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