• We expect property developers to see a slow recovery in sales amidst the Covid-19 pandemic, high property overhang and strict loan requirements.
• Property developers continue to focus on reducing inventories and remain selective on new launches to improve cash flows. Prolonged property market slowdown may kick-start a consolidation of the industry.
• We reiterate our NEUTRAL call on the Property Sector. We believe the attractive average Price/RNAV of 0.35x reflects a slow market recovery. Top BUYs are IOI Properties (IOIPG) and UOA Development.

Reasonable Unbilled Sales to Support 2021 Earnings

Most property developers have reasonable levels of unbilled sales to support an earnings recovery in 2021. SP Setia has the highest unbilled sales of RM8.7bn due to strong sales in the past and some overseas sales with lumpy revenue recognition on completion. Among the property companies in our coverage, Sunway has the highest unbilled sales/revenue ratio of 5.9x, which provides good earnings visibility.

Property Market Recovery in 2022

We hosted the Presidents/CEOs of the Malaysian REIT Management Association (MRMA), Real Estate & Housing Developers’ Association (REHDA) and CBRE|WTW in a virtual conference recently. The speakers generally expect the property market to see a full recovery in rental rates and property transactions in 2022 as the weak sentiment is likely to persist due to job-loss fears, political and economic concerns.

Slow Recovery in Property Sales

Total property transaction volume declined 28% yoy to 115,476 units and value fell 32% yoy to RM46.9m in 1H20, mainly due to the Movement Control Order (MCO) and weak market sentiment due to the pandemic. We understand that primary property sales have picked up after the easing of MCO restrictions in 2Q20. But the imposition of the Conditional MCO in Klang Valley and Sabah could dampen 4Q20 sales. The proposed merger of UEM Sunrise (UEMS MK – N-R) and EcoWorld (ECW MK – N-R) may kick-start an industry consolidation. But we expect further consolidation is unlikely as there are limited synergies to be reaped for other developers to seek merger partners, given the lacklustre property market conditions.

Maintain NEUTRAL Call

Sector valuations are undemanding with average 2020E PER at 14x and Price/book of 0.5x. Aggregate sector core EPS is expected to contract 35% yoy in 2020E and rebound 23% yoy in 2021E. We reiterate our NEUTRAL call on the sector. Our top BUYs are IOIPG and UOA: Deep value in IOIPG and geographically diversified operations, while niche Kuala Lumpur developer UOA provides an attractive dividend yield and strong balance sheet. We also like AME Elite Consortium (AME MK, RM2.10, BUY) as a niche construction/property player for industrial properties, which is seeing strong demand. We upgrade our call on SD Property to HOLD from Sell following the 24% fall in share price from the recent high of RM0.75.

Source: Affin Hwang Research - 18 Oct 2020