Moving into 2020, we do not discount the possibility of sales and GDV launch target revisions taking place if Covid-19 does not ease off. With the absence of the Home Ownership Campaign (HOC) coupled with the recent change in government, home buyers may resort to a wait-and-see stance in 1HFY20. On the other hand, the lower interest rate environment should help to buffer demand as it would reduce monthly repayments by 5.8%. We maintain our NEUTRAL stance on the sector, due to the absence of near-term catalysts to warrant a broad-based re-rating. Our top picks remain with Sunway (TP: RM2.23) and Matrix (TP: RM2.25).

FY20 sales target. Sales figures for the recent results release showed that most developers under our coverage have achieved their respective FY19 sales targets, but note that SP Setia had revised their target downwards to RM4.55bn (from RM5.65bn) during the 2QFY19 results reporting. Looking into FY20, most of the developers under coverage are yet again setting a relatively flat target, with the exception of Sunway (+27%) and UEMS (+77%). Overall, we remain cautious on the targets as the ongoing Covid-19 outbreak may potentially dampen sales.

Covid-19 impact. The expectation of 2020 to remain a challenging year for property developers is now further hit by the Covid-19 outbreak as some developers have resorted to cutting down on property launch events in Malaysia. The impact is likely most apparent for IOIPG as its property arm in China has essentially been on halt given the mobility constraints in place, resulting in both the construction activities and potential sales activities to be affected. As of now, developers have not confirmed any delays in launches but are monitoring the situation. Given that the outbreak outside China has recently escalated, we do not discount the possibility of sales and GDV launch target revisions taking place if it does not subside. Moreover, with expectations for Covid-19 to take a toll on the broader economy (our economics team is looking at sub-3% GDP for 1Q20), buyers may opt to wait out on property purchases.

Recent cuts in OPR. With two OPR cuts (to 2.50% from 3.00%) taking place recently (22 Jan and 3 Mar), housing loan rates should also see a decrease which then improves the affordability for home buyers. Our calculation implies that monthly instalments would decrease by 5.8%, assuming the average loan rates reduce in unison to the OPR cuts i.e. -50bps (Figure #2).

Outlook. With the absence of the Home Ownership Campaign (HOC) coupled with the recent change in government, home buyers may resort to a wait-and-see stance in 1HFY20. We believe these factors may result in 2020 recording a slower growth in terms of transacted volumes, if developers do not maintain sufficient discounts to entice buyers. On the other hand, the lower interest rate environment should provide some buffer in this challenging environment. We maintain our NEUTRAL stance on the sector, due to the absence of near-term catalysts to warrant a broad-based re-rating in this challenging environment. However, the trough valuations (coverage universe P/B at 0.6x or -2SD below 5-year mean) should lend some support on the downside. For our top picks, we continue to like

Sunway (BUY, TP: RM2.23) as an underappreciated property-construction conglomerate with mature investment properties, growing trading and quarry division and potential monetisation of healthcare business. We also like Matrix (BUY, TP: RM2.25) as it rides on the affordable housing theme within its successful townships with cheap land cost and sustained property sales coupled with future potential job flows from its Indonesian venture. Its dividend yield of over 6% remains one of the highest in the sector.

Source: Hong Leong Investment Bank Research - 10 Mar 2020