Investment Highlights

• We have a NEUTRAL stance on the property sector over the next 12 months. We believe the change in the political landscape post-GE14 (14th general election) will have limited impact on the sector as a whole as various key challenges remain, including: (1) the generally still elevated home prices; (2) the low loan-to-value (LTV) or financing margin offered by banks; (3) rising interest rates (with OPR expected to rise to 3.5% in 2019 from 3.25% currently); (4) the weak job security in selected industries such as finance, media and oil & gas; and (5) house buyers' inability to qualify for a home mortgage due to their already high debt service ratios (DSR), which is also reflected in the high household debts at the national level.

• The DSR is calculated by dividing one's debt service obligations by his or her income (most banks observe a cap of 60% for the low-income group, and up to 80% for the high-income group). Potential house buyers may have little room left to take on a home mortgage due to their existing debt service commitments (arising from outstanding study, car or personal loans), while their incomes have not kept pace with the commitments.

• Pakatan Harapan in its GE14 manifesto spoke of “the construction of one million affordable housing units over its two terms in administration”, a rent-to-own scheme for the low-income group (B40) and middle-income group (M40) and the provision of affordable rented homes for young people. In short, we believe affordable housing will still be the key focus in the property sector at least over the next 12-18 months.

• We are mindful that affordable housing typically commands low margins. The margins could be crimped further given rising competition as the segment gets more crowded by the day. We believe the investment case for an affordable housing developer only holds water if the developer is able to sell affordable houses in large quantities, has access to highly costeffective and speedy construction methods, and most importantly, has the ability to secure strategic landbank with a high plot ratio at cheap prices. Otherwise, we are more inclined to see selling affordable housing as a means for developers in general to tide themselves over while waiting for the property market to turn around.

• We see a bright spot in developers with overseas projects. We have already seen green shoots of recovery in property markets in Australia, Singapore and Vietnam since the beginning of 2017. These markets are ahead of Malaysia in terms of their recent boom-bust cycles. They have been through the consolidation phase and are now on a recovery path.

• REITs tend to underperform in a rising interest rate environment. Retail REITs may be hurt further by the rise of ecommerce. We advocate stock picking in the REIT sector.

• We may upgrade our NEUTRAL stance for 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.

• Our top picks for the property sector are Sunway (BUY, FV: RM1.99) and Titijaya (BUY, FV: RM0.73). We like Sunway given that its local properties launches are generally well received due to good locations, coupled with strong contributions from its overseas property ventures and its construction arm. Meanwhile, we like Titijaya as its focus and strength are right in the affordable segment. Its earnings visibility is strongly backed by RM368mil unbilled sales and some RM873mil planned launches over the immediate term.

• Our top pick for the REIT sector is YTL REIT (HOLD, FV: RM1.32) as it offers proxy to the vibrant hospitality industry in Australia (under the Marriott brand name) and an attractive yield of >6% (stable with >50% NPI backed by master leases).

Source: AmInvest Research - 8 Jun 2018