We maintain NEUTRAL on the sector which continued to be weighed down by oversupply, eroding purchasing affordability on the back of rising interest rates, and soaring construction cost. The sector’s 2QCY22 results of our stock universe deteriorated slightly against the last quarter but probably did not come as a huge surprise to investors. Certain developers reported healthy profitability but they could face margin pressures moving forward as the sharp rise in the construction cost recently could have blown away their contingency budgets. We notice that certain developers have held back launches, we believe, as the high construction cost puts at risk the viability of the launches, more so on labour shortages and a rising interest rate environment. Under this highly challenging operating environment, we pick developers with a strong cash flow that could anchor good dividends, namely, ECOWLD (OP; TP: RM0.83) and IOIPG (OP; TP: RM1.60).

Slight deterioration sequentially. There was a slight sequential deterioration in the recently concluded 2QCY22 results season with 11%, 78%, and 11% coming in above, within and below our forecasts vs. 22%, 67% and 11% during the preceding quarter, respectively, but we do not regard as alarming (see table on Page 2). IOIPG was the only company that beat our forecast thanks largely to stronger-than-expected overseas operations (Singapore and China), while MRCB was the only company that missed our forecast as its property unit struggled to cover overheads on low sales.

Sales picked up on economy reopening. On a brighter note, most companies met our expectations in terms of 1HCY22 sales, we believe, as home buyers could physically visit sales galleries after the reopening of the economy, with MRCB and SIMEPROP even beating our assumptions. MRCB beat expectations upon launching its Vivo 9 Seputeh completed commercial units while SIMEPROP beat on launching the right products at the right price within their matured townships coupled with efficient use of various marketing initiatives to reach its target market.

Conversely, new launches trailed. YTD, most developers are still trailing their full-year targets for new launches, we believe, as the high construction cost puts at risk the viability of the launches, more so on labour shortages and a rising interest rate environment that erodes housing affordability. We take comfort that the cost of certain inputs, such as steel, has been easing over the last couple of months.

Maintain NEUTRAL. The outlook for the sector will continue to be clouded by oversupply and labour shortages, while housing affordability is eroding on the back of rising interest rates and soaring construction cost. On one hand, share prices of property companies could have found the bottoms (as most of them only trade at a fraction of their RNAV). On the other hand, there is no re-rating catalyst in sight. Under this highly challenging operating environment, we pick developers with strong cash flow that could anchor good dividends, namely, ECOWLD (OP; TP: RM0.83) and IOIPG (OP; TP: RM1.60). We also like ECOWLD for its strong brand and IOIPG for the hidden value in its prime investment properties, in the Klang Valley, Singapore and China that could potentially be unlocked via a REIT.

Source: Kenanga Research - 6 Sept 2022