The recent result season for developers saw more misses than hits. Out of 13 property companies under our coverage, seven disappointed, five came in inline broadly within expectations while only one, namely MRCB which beat expectations. Most developers are lagging behind current year’s sales estimates or company targets, save for UOADEV and CRESNDO, while quite a number of companies have revised down guidance for the year. Signs of sectorial down-cycle are more evident as property companies’ previous reporting seasons saw sales either meeting or behind of targets while there are relatively fewer earnings downward revisions. As a result, the current year sales trend could be flat to declining, YoY. The weaker landscape is due to tighter lending liquidity and buyers’ wariness, which lowers the odds of a pre-GST demand rally. Additionally, industry experts expect the sector to be quiet 3-6 months post GST implementation as buyers adopt a ‘wait and see’ stance. While developers are reluctant to guide on next year’s sales targets, we note a tone of caution in the air. We also see more cash calls and expect more to come, which may affirm a view of a more challenging 2015. Our sector call (previously NEUTRAL) is UNDER REVIEW, pending our upcoming sector report, with a potential downside bias to CALLs/TPs for stocks under our coverage/On Our Radar as we may trim earnings/sales further.

More earnings disappointments than usual. Out of the 13 property companies under our coverage, 7 (CRESBLD, IJMLAND, IOIPG, SPSETIA, TROP, UEMS and UOADEV) developers came in below our expectations, 5 (CRESNDO, HUAYANG, MAHSING, MATRIX, and HUAYANG) were inline or broadly within, while only MRCB performed better than expected. The earnings disappointments were largely due to: (i) higher operating costs particularly A&P and development margins, (ii) slower-than-expected recognitions and timing differences regarding land disposals. MRCB’s performance was driven by better contribution from its property division. During this result season, earnings adjustments for: (i) current financial year’s earnings forecast was lowered for 5 companies (CRESBLD, IJMLAND, IOIPG, UOADEV, and SPSETIA) while we upgraded our earnings estimate for MRCB, and (ii) next financial year’s earnings forecast was lowered for 6 companies (CRESBLD, IJMLAND, IOIPG, UOADEV, SPSETIA and TROP) while MRCB earnings were upgraded. Most Calls/TP were maintained as we had downgraded the sector call last quarter to NEUTRAL; the exception was CRESBLD (Downgrade in TP) as we widened our property discount factor to 60% (previously 50%) given the weak sentiment ahead.

Weaker headline sales figures ahead. As for property sales, only UOADEV is on track to meeting our full-year sales estimates, largely because we trimmed targets last quarter. MAHSING was proportionately behind their internal target but within our target. CRENSDO was the only one that exceeded expectations. The others were still lagging behind in terms of meeting sales target. While there were no significant QoQ and YoY trend for property developers, it was rather uninspiring as the quarterly sales performance showed rather flattish to declining trends. The driving reasons are the deferment of launches towards 4Q14 or 2015 and weak buyers’ sentiment particularly running up to the first OPR hike and Budget-2015 announcement. The lending environment has also become challenging, as developers are observing slow bookings to SPA conversions across all property segments.

Sales guidance lowered since a year ago. In terms of comparing sales guidance from developers or our sales assumptions at the start of the year compared to today, most developers have cut their sales targets for the current financial year, save for (i) SUNWAY who was already estimating flat sales from the start of the year, (ii) IOIPG as they are just starting a new financial year while we are estimating flattish sales growth, (iii) MAHSING which is still confident of achieving its RM3.6b sales target while we maintain our assumptions of RM3.3b, (iv) MRCB which delivered as per our assumptions thanks to our flat YoY estimates. Over the year, UOADEV, TROP, UEMS have seen drastic cuts in sales estimates by 20%, 25% and 35%, respectively, while IJMLAND has toned it down by 9%. SPSETIA is also unlikely to meet their RM5.0b sales target as well. Mid-cap developers like HUAYANG and MATRIX also saw a reduction in current financial year sales assumptions by 12% and 18%, respectively, while we were already estimating YoY lower sales for CRESBLD. As a result, the current financial year sales achieved may likely be flat-to-declining for most developers, save for MAHSING and CRESNDO, which may likely record better YoY trends.

Signs of sectorial down-cycle are more evident. The last time we observed the above weak trends was back in 2008-09 where the Global Financial Crisis affected buyers’ sentiment, and thus, demand. Until recently, developers’ result seasons tend to be: (i) mixed in terms of earnings delivery as timing of recognition of multiple projects can fluctuate depending on launch timing and scale of the project, (ii) within expectations with regards to meeting sales targets or our estimates. This was due to the Malaysian property developers enjoying a strong run-up in sales and prices over 2013-14 on the back of strong domestic liquidity and the low interest rate environment. However, the main difference between now and the Global Financial Crisis period is that the current weaknesses are largely driven by domestic factors including: (i) tighter lending environments as banks are concerned about asset qualities due to the significant run-up in property prices over the last few years, (ii) impending GST, which may cause the market to be quiet 3-6 months after implementation, and (iii) potential interest rate hike risks in 2HCY15.

Lending taps remain tight post Budget-2015. Based on feedbacks that we gather, the lending environment for properties remains tough as there are no clear signs that the banks will be turning on their lending taps anytime soon. The current Loan to Deposit (LD) ratio is already on the higher side, averaging at 81% as of 2QCY14, whereby Malaysia’s five larger bank i.e. PBBANK, MAYBANK, CIMB, AMBANK, RHBCAP has hit LD ratios of between 87.8% - 100.8%. Accordingly to our banking analysts, in order for banks to grow loans growth further, they will need more deposits. On this front, the competition for more deposits has been rising whereby banks have been aggressively advertising in the media to lock in more fixed deposits (FD) through having periodic promotions by offering higher than usual FD rates at ~4-5%. That said, we still expect to see more property launches in 4Q14 (post Budget-2015) as the months running up to Budget-2015 were very quiet. However, developers are more cautious and we observed them fine-tuning their products offerings and breaking up launch sizes into more digestible sizes. Developers are also buffering a longer lead time in terms of conversion of bookings to SPA sales and are embarking on more advanced buyers’ credit screening before even bookings can be made. In essence, developers are going to have to work very much harder.

Weaker FY15 headlines sales ahead? As for next financial year’s sales guidance, most developers have yet to make a commitment but seem to lean to the side of caution. Many of them cited that the next few months will serve as indicators for FY15E sales. Note that we may trim more of our sales and earnings forecasts for FY15 in our upcoming strategy report.

Expect more fund raising. Thus far, IOIPG, MAHSING and CRESBLD have announced cash calls on the premise of financing CAPEX, project infrastructure and balance sheet management. Sunway will also be spinning off their construction arm, Sunway Construction, by end 1HCY15 while WCT is expected to “reit” their investment properties in 2015. We get the sense that developers are preparing for a challenging 2015. We do not discount more cash calls or unlocking of values in the coming quarters from developers under our coverage, particularly those with steeper net gearing levels or hefty commitments in terms of CAPEX, overseas projects or sizeable project infrastructure costs. Also, landbanking opportunities may also arise in challenging times, particularly when landbanking has been challenging over the last few years, and developers need to have ready financing in place to seize such opportunities. We expect most of the developers under our coverage to embark on some form of cash calls, save for UOADEV, CRESNDO and SPSETIA whom we expect will rely on their strong internally generated funds or borrowings.

UNDER REVIEW. Our sector call (previously NEUTRAL) is UNDER REVIEW with a potential downside bias to CALLs/TPs for stocks under our coverage and under our On Our Radar space, pending our upcoming sector strategy. While developers are still banking on a pre-GST demand rally in 4Q14 and 1Q15, we are taking a more moderate stance on the matter as lending liquidity to the property space has slowed down tremendously, which will cap demand upsides. The sector may go through a period of declining sales and cost pressures, which will hurt future earnings. We are also concerned that we will be seeing structural change in the developers’ space once GST is implemented, which will have implications on valuations. Currently, average discount to FD RNAV for developers under our coverage is 41% vs. historical peak discount levels of 55% (historical low is 25%). Those under our On Our Radar recommendations are pegged at 45%-60% discount rates.

Our Previous CALL/TPs are as followed;

(i) OUTPERFORM: CRESNDO (OP; TP: RM2.95), CRESBLD (OP; TP: RM1.52), HUAYANG (OP; TP: RM2.60), IOIPG (OP; TP: RM3.10), MATRIX (OP; TP: RM3.48), MAHSING (OP; TP: RM3.05), SUNWAY (OP; TP: RM3.87), MRCB (OP; TP: RM2.48).

(ii) MARKET PERFORM: TROP (MP; TP: RM1.28), SPSETIA (MP; TP: RM3.30), UEMS (MP; TP: RM1.93), UOADEV (MP; TP: RM2.00).

(iii) ACCEPT OFFER: IJMLAND (AO; TP:RM3.55)

(iv) On Our Radar Recommendations: IWCITY (TB; FV: RM3.39), KSL (TB; FV: RM6.63), GOB (TB; FV: RM1.23), GLOMAC (TB; FV: RM1.27), GUOCO (TB; FV: RM2.95), SBCCORP (TB; FV: RM3.24), TITIJYA (TB; FV: RM2.95-RM3.32).

Source: Kenanga