• We expect reimposition of the Movement Control Order (MCO) in major property demand states to have a negative impact on property sales during the MCO period of 13-26 January 2021, as sales galleries will be closed.

• The previous MCO led to a 34% yoy decline in aggregate 1H20 sales of property-related companies under our coverage, due to the weak property market sentiment and job-loss concerns. But core earnings impact is unlikely to be as severe since construction works are mostly allowed.

• We reiterate our NEUTRAL call on the Property Sector. Key risk is a prolonged MCO, impacting sales. Top BUYs are Sunway and UOA.

Sales Galleries Closed But Building Works Allowed

The Malaysian government has imposed MCO 2.0 for a 2-week period from 13-26 January 2021 in 5 states and 2 Federal Territories, ie, Penang, Selangor, Johor, Melaka and Sabah. The Ministry of Health (MOH) indicated that the maximum period is 4 weeks, if the MCO is extended. The sales galleries/showrooms of property developers will have to close during the period. However, building construction sites are allowed to operate subject to approval by the Ministry of International Trade and Industry (MITI).

MCO Impact May Not be as Severe as Previous Episode

Building construction sites with Centralised Labour Quarters (CLQ) or dedicated transportation services to take workers from offsite CLQ to the sites are allowed to operate if approved by MITI. Based on our channel checks with major property developers, we gather that most of their ongoing projects meet the requirements to continue building works subject to approval by MITI. Hence, progress billings will continue for most property projects and the revenue impact to the developers from MCO 2.0 will likely not be as substantial as the previous MCO (construction sites were not allowed to operate) last year.

Recovery in Property Sales in 2Q20

With the closure of property sales galleries during the MCO 2.0 period, sales will be adversely impacted due to reduced onsite marketing activities and inability to close sales by signing Sales and Purchase Agreements (SPA). However, if the MCO 2.0 duration is just for 2 weeks, the impact may not be as substantial as 1H20 when sales galleries were closed for 47 days during the MCO 1.0 period of 18 March-3 May 2020. We maintain our sales and earnings forecasts for the property-related companies that we cover as we expect pent-up housing demand to drive a sales recovery in 2Q20 before the Home Ownership Campaign ends on 31 May 2021.

Maintain NEUTRAL Call

We believe sector valuations are fair with average 2021E PER at 16x and Price/book of 0.5x. Aggregate sector core EPS is expected to rebound 12% yoy in 2021E from a 33% yoy contraction in 2020E. We reiterate our NEUTRAL call on the sector. Our top BUYs are Sunway and UOA. Key risk is a prolonged MCO impacting sales.

MCO 2.0 impact is not as severe as MCO 1.0

Weak Property Sales in 1H20 Due to MCO

The economic impact of MCO 2.0 is not expected to be as severe since it covers 5 states and 2 Federal Territories (contributes 66.4% of total GDP) and is not nationwide like MCO 1.0 last year. Five essential economic sectors, ie, construction, services, trade and distribution, and plantations and commodities, are also allowed to operate under MCO 2.0. Although building works for most projects can continue, MCO 2.0 in the 6 states will adversely impact property sales of the developers since sales galleries will be closed in the MCO 2.0 affected areas that contributed 47% of total property transaction volume and 70% of transaction value in 9M20.

Sales and Core Earnings Contracted Sharply in MCO 1.0

Aggregate sales and core earnings for major property-related companies under our coverage contracted by 34% yoy and 55% yoy respectively in 1H20. This was mainly due the MCO imposed by the government during a 47-day period on 18 March-3 May 2020. The impact of MCO 2.0 will likely be less severe due to the shorter duration, unless extended, and the property companies’ expansion of online marketing efforts such as virtual property tours following MCO 1.0. Property-related companies with major overseas property projects such as IOI Properties and Gamuda saw relatively less impact due to robust overseas sales. However, property companies that own retail malls and hospitality businesses such as IOI Properties and Sunway were adversely impacted by the MCO due to lower mall footfalls (granting rental waivers to tenants) and hotel occupancy rates.

Earnings Impact Is Likely Less Severe Under MCO 2.0

We believe the core earnings impact will be less severe this time around as the property developers under our coverage are able to operate most of its construction sites during the MCO period. Progress billings to customers can continue during the MCO based on the percentage completion rate. The property developers and their panel of contractors are also better prepared to ensure the building material and equipment supplies are available to minimise disruptions to ongoing construction works. The Standard Operating Procedures (SOP) are also in place to reduce the risk of Covid-19 infections at the construction sites and to meet the government’s requirements to operate during MCO.

Key Earnings Forecast Risk Is a Prolonged MCO Period

MCO 2.0 is for a period of 2 weeks. If the MCO is just for 2 weeks, we believe the impact on sales is not substantial since the first quarter is seasonally a slow quarter due to the festive holidays. There is a risk that MCO could be extended given the surge in Covid-19 infection cases recently and it could take a longer period to flatten the curve. But the MOH indicated that the maximum MCO 2.0 period is 4 weeks. The prolonged period of MCO and the Covid-19 pandemic affects property market sentiment due to concerns of job losses. Retrenchments spiked 278% yoy to 34.8k in 2Q20 and the unemployment rate hit a high of 5.1% in 2Q20. The unemployment rate remains high at 4.8% in November 2020.

Maintain Our NEUTRAL Call on the Property Sector

Property company share prices under our coverage are trading at a sharp average discount to RNAV of 57%, above the 5-year historical average of 48%. Although there is potential downside risk to share prices as the discount to RNAV expanded to a peak of 67% during the previous MCO, we believe the weak property sector outlook in 2021 is reflected in the undemanding sector valuations. We reiterate our NEUTRAL call on the Property Sector. Top sector BUYs are Sunway (diversified conglomerate) and UOA Development (niche developer with strong balance sheet).

Source: Affin Hwang Research - 15 Jan 2021