Reiterate NEUTRAL on Developers. Over 1QCY19, property stocks rebounded stronger than the broad market with the KLPRP charting +5.9% YTD vs. the FBMKLCI (-0.1% YTD), following a severe bashing down of property stocks over 4QCY18. The odds of a potential 25bps OPR rate cut in 2H19 appears to be increasing, but affordability ratio will only improve slightly (<3%) on such cut. Meanwhile, we note that banks which are already facing NIM compressions may be reluctant to narrow lending spreads further; note that our analysis indicates that property transactions have a high correlation to lending spreads oppose to the actual interest rate level itself. So an OPR cut may offer some reprieve for the sector but is unlikely to drive demand to new heights. Currently, banks are under pressure to be more flexible with lending although we note that household debt remains relatively high at 83% of GDP at end-2018 (down from 83.8% in 2017). A meaningful measure to alleviate the tight liquidity to the sector must ultimately results in improved effective margin of financing. Another impactful measure is bridging the gap of the initial property down-payment, which is the main hurdle of first-time house buyers. We are also awaiting the finalized property crowdfunding framework by SC post its public consultation exercise; depending on the scale and parameters, this could be a game changer as well as a re-rating catalyst for developers. Our universe’s total sales/earnings trajectories are generally unexciting at -3%/+9% YoY in FY19-20E and +2%/+12% YoY in FY20-21E. Our universe’s average RNAV/SoP discount has narrowed to 64.6% from last quarter’s 67.7% but still remains steeper than it was a year ago (61.7%). Expect valuations to remain range bound until there are significant catalysts (e.g. easing of lending liquidity to the sector) or improvements in ROEs which are now at record lows. Most of our universe’s RNAV/SoP discounts are pegged at -1.0SD to historical trough levels, in-line with ROE trends. Investors should look at rotational laggards with OUTPERFORM recommendations like ECOWLD, IOIPG, MAHSING and SPSETIA; our preference is IOIPG (OP; TP: RM1.65) as the stock has been the most bashed-down while we are comfortable with its current valuation.

Rebounded better than the broad-market. The KLPRP index rebounded over 1QCY19* charting +5.9% YTD vs. the FBMKLCI (-0.1% YTD), following the very weak 4QCY18. Recall that post Budget-2019 announcement in Nov-2018, property stocks were hammered down given government directives for developers to reduce house prices by 10% (due to SST exemptions on construction/building materials) and overall broad market weakness. Our preferred pick for 1QCY19, UEMS, did well over the quarter with share price rising by 30% YTD. We downgraded UEMS to MP (TP: RM0.850) on 27/2/19 post the early year rebound. In terms of the recent 4QCY18 reporting season, it was still a mixed-bag for developers, although we noted that CY18 sales did better than expected; ironically, developers who did see better headline sales also experienced weak earnings delivery given margin compressions while ROEs remain at a record low (refer to APPENDIX result review details).

Source: Kenanga Research - 4 Apr 2019