1Q22 results came in mixed with 2 earnings beat, 3 in line and 3 below. Sector profit declined -25.1% QoQ and flattish at +1.8% YoY. Key issues we highlight for 1Q22 are (i) labour shortage in construction impacting progress billings; and (ii) end of HOC negatively impacting SP Setia and UEMS with exposure in the mid to-high range properties, while benefitting Mah Sing with exposure in the affordable range properties. Overall, we believe the sector is still on a recovery trajectory, while challenges such as labour shortage, rising construction cost, supply chain disruption and interest rate hikes pose key downside risks. Maintain NEUTRAL with top picks Sunway, Mah Sing and Matrix.

1Q22 results round up. During the recently concluded 1Q22 reporting season, the results were a mixed bag (see Figure #1) as 2 out of 8 property stocks we cover came in above our estimates (IOI property, Mah Sing), 3 in line (Sunway, Sime Darby Property, UEM Sunrise) and 3 below (SP Setia, Matrix, Lagenda). When stacked against consensus estimates, there were more results disappointments with 1 above (IOI Property), 2 in line (Sunway, Sime Darby Property) and 4 below expectations (SP Setia, Matrix, UEM Sunrise, Lagenda). Overall, sector profits declined by -25.1% QoQ and flattish at +1.8% YoY.

Labour shortage impacted progress billings. One of the key issues that surfaced during 1Q22 was the issue of labour shortage. 5 companies (SP Setia, Sime Darby Property, Matrix, UEM Sunrise, Lagenda) have highlighted labour shortage issue as a key challenge faced by the companies. Due to labour shortage, construction activities during the quarter were constrained resulting in lower progress billings. This issue had also likely caught investors off guard as 4 out of these 5 companies earnings came in below consensus’ estimates. While the labour shortage issue has been plaguing the construction segment since last year, it has only became apparent in 1Q22. Recall in 2021, construction work came to a complete halt in June, while restrictions ease progressively from July to Oct. Despite construction activities normalizing since Oct, nonetheless, the earnings impact from labour shortage were not apparent in 4Q21 as the impact was likely partially cushioned by the strong sales boosted by the HOC campaign as buyers rush to take advantage of the campaign before it ends.

End of HOC has mixed impact on sales. Referring to Figure #2, SP Setia and UEM Sunrise experienced a sales decline on both QoQ and YoY mainly due to the end of HOC which supported sales in previous year as most of their properties were in the mid to high price range. On the other hand, Mah Sing with c.60% of its properties in the affordable segment (<RM500k) enjoyed a surge in sales on both QoQ and YoY likely due to the end of HOC, as competing mid and high range properties no longer offer stamp duty waiver.

Outlook. Despite the earlier than expected interest rate hike cycle, the overall macro environment in Malaysia remains supportive for the property sector. This is on the back of (i) economy recovery (real GDP grew by +5% YoY in 1Q22); and (ii) relatively well contained inflation compared to other regions (due to government subsidy on retail oil prices). Nonetheless, key headwinds such as labour shortage in the construction sector, rising building material cost and supply chain disruption will continue to pose downside risks to the sector. One of the key downside risks to look out for in upcoming quarters is the compressed margin as the effect of rising construction costs start to kick in. While most developers have generally downplayed the rising construction costs impact with guidance ranging from no impact to moderate impact on margin, we believe that developers, particularly those that have a lower pricing power will be impacted in coming quarters, especially during project completion stage when costs are finalized.

Maintain NEUTRAL on the sector and we continue to advocate investing in selective names that would fare relatively better under the current macro environment. Our top picks are Sunway for its well-integrated property, construction and building material business model. It is also one of the prime beneficiaries from economy recovery and borders reopening. Additionally, we like Mah Sing for its exposure in the affordable segment and its asset-light business and quick turnaround business model. Finally, we also like Matrix for its generous dividend payout ratio of >50%, translating to an attractive dividend yield of 6.3-6.7% for FY23-24, being one of the highest in the sector. Besides, its strategically located developments are also well positioned to capture the spill over demand from Klang Valley.

Source: Hong Leong Investment Bank Research - 7 Jun 2022