Property developers continue to face supply-demand imbalance amidst the Covid-19 crisis. Further, we anticipate the lifting of banking moratorium loans on 30th Sep 2020 to exert some pressure on home prices as desperate secondary market sellers offload their properties which would also compete with the primary market for buyers. All these factors would continue to throw a spanner into developers’ sales targets which have already seen cuts as deep as 50% during 1QCY20 earnings season.

That said, we think that the current depressed valuations are unlikely to get worse with supportive policies implemented by the government. Despite already rebounding 25% from YTD lows, the current KLPRP PBV of 0.38x is still considered attractive compared to the Global Financial Crisis (GFC) low (of 0.47x) and Asian Financial Crisis (AFC) low (of 0.39x). Overall, we still see upside especially for quality names such as IOIPG and SIMEPROP. Thus, tactically, we maintain Overweight on valuation grounds.

1QCY20 results mostly worse-than-expected. In our universe of 11 developers, all performed below expectations, except MRCB and UOADEV which had lumpy recognitions to support earnings. Needless to say, the Movement Control Order (MCO) induced by the Covid-19 crisis was the main culprit which caused lower-than-expected sales, progress billings and also margins.

Drastic underperformance. As of 30th June 2020, KLPRP is down 25.1% YTD compared to KLCI’s drop of only 5.5%. Leading the decliners were SPSETIA (-47%), ECOWLD (-44%) and UEMS (-38%) while UOADEV (-9%) and MAGNA (-13%) were the relative outperformers. The underperformance was mainly attributable to already weak fundamentals exacerbated further by deteriorating economic conditions and evaporating consumer confidence, in the midst of the Covid-19 pandemic.

Structural issue persists. The supply-demand imbalance in the property market is expected to persist. Essentially, the high inventory levels – comprising existing stocks and incoming supply of unsold units still under construction – will remain elevated in the foreseeable future. On the other hand, demand will likely weaken in the midst of economic uncertainties arising from Covid-19 and oil price slump.

Secondary market could clash with the primary market. Further, once the banking moratorium expires on the 30th Sept 2020, there could be desperate sellers in the secondary market which will compete with the primary market for buyers. Depending on the severity of the situation (which would only be assessable post 30th Sept), these secondary sellers could possibly drag prices down. Also because of this, potential buyers might hold off purchases beyond Sept-30th for deeper discounts. The confluence of these factors would exacerbate the already weak supply-demand dynamics faced by the industry.

Overall, property developers will find it increasingly challenging to clear their inventory of completed properties and achieve new property sales targets this year. Case in point, post 1QCY20 results, we have seen developers under our universe reducing sales targets by as deep as 50%

Source: Kenanga Research - 8 Jul 2020