Highlights

• Unexpected rate cut… BNM cut its OPR by 25 bps to 3%. In our scenario analysis, we have assumed mortgage financing cost to reduce from average 4.60% to 4.35%.

• Minor impact on monthly instalments… Based on our calculation, a 25 bps rate cut will reduce monthly instalment by circa 3% or RM67/mth for RM500k property with loan tenure of 30 years (Refer Fig 1).

• Hou sing affordability to increase slightly… For every RM3,000 of fixed monthly instalment, a 25 bps cut will raise the amount of loan eligibility from RM585k to RM603k or a 3% increase (Refer Fig 1).

• Limited underlying impact but positive on near term sentiment… We opine that a 25 bps cut would not impact underlying demand significantly given the muted impact on affordability. However, we view the rate cut positively on near term sentiment given the low expectation on the property sector.

• More easing measures on the way? BNM said that previous property cooling measures such as removal of DIBS and RPGT hike have successfully reined in property speculation activity. As such, we do not rule out any potential relaxation of property measures. High beta stocks such as EcoWorld (Non-Rated) and UEM Sunrise (Hold) are main beneficiaries.

• Sector expectation is low and is trading at slightly above -1 SD… Sector valuation is trading at 0.75x P/B, slightly above -1 standard valuation (SD) band (at 0.68x) vs. crisis level of 0.47x vs. average of 0.81x. For RNAV band, the sector (big cap) is also trading at 43% discount, slightly above -1 SD. Any potential relaxation of property measures will be a key-re-rating catalyst.

Rating

NEUTRAL

• Neutral with upside bias in anticipation of potential easing of property measures.

• Positives: Favourable demographics with housing inflation hedge;
• Negatives: Prolonged weakening in consumer sentiment and tightening policy.

Valuation

• Top Picks:

• Big Cap: IOI Prop (BUY; TP: RM2.77). IOI Prop is one of the value stocks in our universe coverage given it is only trading at 0.7x CY16 P/B as compare to peer at average 1x. We believe the stock warrants a re-rating given its strong t rack record in township development and its attractive valuation.

• Mid to Small Cap: Matrix Concepts (BUY; TP: RM2.91). Dividend yield for Matrix is one of the highest in the sector at 6%.

Source: Hong Leong Investment Bank Research - 14 Jul 2016