We maintain NEUTRAL on the sector as it continues to be weighed down by oversupply and cautious lending by the banks, while housing affordability is eroding on the back of rising interest rates and soaring construction cost, not to mention the already high household debt to GDP ratio in Malaysia. Our top picks are developers with strong cash flows that could anchor good dividends, namely, ECOWLD (OP; TP: RM0.83) and IOIPG (OP; TP: RM1.60).

Macro headwinds persist. The operating environment for developers remains challenging, manifested in: (i) the flattish Malaysian house price index (HPI) over the recent years, having contracted QoQ in 2QCY22 despite rising building and land costs, (ii) loan approval rate remaining low at 37% (as of 1HCY22) compared to 43-52% during the upcycle in 2011-2014, and (iii) the household debt to GDP ratio remaining elevated. Meanwhile, housing affordability is eroding on the back of rising interest rates and soaring construction cost. The high construction cost also translates to higher selling prices, putting the viability of new launches at risk.

Market trends. Based on NAPIC’s latest 2QCY22 publication, there was some reduction in units in circulation (which includes overhang and unsold under construction units) against the high recorded in 2021. Despite the reprieve, we note that there is still a long way towards recovery as units in circulation are still rather high versus historical levels – creating price competition and pressure for new unit launches. Within key states (KL, Selangor, Penang, Johor), we note that prices for terrace house were the only sub-segment that have shown growth since the onset of the pandemic while prices of high-rises and detached homes have declined. Taking the cue from the numbers, we believe developers focusing on landed townships (i.e. ECOWLD, IOIPG, and SIMEPROP) will fare better than the rest.

Our top picks are developers with strong cash flows that could anchor good dividends, namely, ECOWLD (OP; TP: RM0.83) and IOIPG (OP; TP: RM1.60). We like ECOWLD for its strong branding while IOIPG is for the hidden value in its prime investment properties in the Klang Valley, Singapore and China, which could potentially be unlocked via a REIT.

Source: Kenanga Research - 26 Oct 2022