We maintain our NEUTRAL stance on the property sector. We are not convinced that the recent run-up in share prices of selected property stocks can be attributed to a recovery (or an impending recovery) of the sector, especially in Johor. The Johor Bahru-Singapore rapid transit system (RTS) is not a new project. It started in 2020 and will only be completed in 2026. While MyHSR Corporation recently initiated a request for information (RFI) to solicit concept proposals from local and international players for the behemoth Kuala Lumpur-Singapore high-speed rail project, the bankability of any public infrastructure project of this scale is always in question. Meanwhile, the local property sector continues to be weighed down by oversupply, cautious lending by financial institutions, eroding housing affordability, and high household debts. Nonetheless, we see bright spots in ECOWLD (OP; TP: RM1.03) and IOIPG (OP; TP: RM1.60) as they continue to report brisk sales and hence generating strong cash flows with the right products, enabling them to pay good dividends.

Strong share price performance of selected property stocks. Share prices of selected property stocks have seen strong performance in recent months. Since Jul 2023, the share prices of UEMS (NR), SIMEPROP (downgrade to MP from OP; TP: RM0.55) and MRCB (NR) have appreciated 106%, 31% and 31% respectively (see chart below).

No broad-based recovery of the sector, as yet. We are not convinced that the recent run-up in share prices of selected property stocks can be attributed to a recovery (or an impending recovery) of the property sector, especially in Johor. The Johor Bahru-Singapore RTS is not a new project. It started way back in 2020 and will only be completed in 2026. While MyHSR Corporation recently initiated an RFI to solicit concept proposals from local and international players for the behemoth Kuala Lumpur-Singapore high-speed rail project, the bankability of any public infrastructure project of this scale (in any part of the world) is always in question in the absence of financial support from the government.

Company-specific re-rating catalysts. Instead, we believe the re-rating catalysts came from company-specific developments. For UEMS, it was triggered by parent UEM Group announcing efforts with Itramas Corp, which is the largest vertically integrated solar developer in the country to develop a 1GW hybrid solar photovoltaic power plant integrated with an RE (renewable energy) Industrial Park in Malaysia. The group is in discussion with the project investors (Blueleaf Energy, China Machinery Engineering, & HEXA Renewables) to explore multiple roles, such as collaborating on project development, financing and commercialisation.

Similarly, investors got excited over SIMEPROP (TP: RM0.55) as it is working with the government on a rooftop solar project for its upcoming City of Elmina development in Shah Alam that it expects to launch in 4QCY23. SIMEPROP is exploring the potential of rooftop solar in 1,000 residential landed units in City of Elmina and this initiative could be extended to 10,000 future SIMEPROP homes within the next five years. We downgrade our call on SIMEPROP to MARKET PERFORM from OUTPERFORM as valuations have become rich after the recent run-up in its share price.

Meanwhile, Transport Minister Anthony Loke announced early this month that the Cabinet has agreed in principle to award the RM1b Kuala Lumpur Sentral redevelopment project to MRCB via a privatisation deal.

Still difficult. We maintain our view that the sector’s prospect will remain challenging amidst higher interest rates and rising inflation resulting in weaker consumers’ big-ticket item purchasing power. Furthermore, household affordability would continue to erode along with the government’s intention to remove petrol and electricity subsidies for the T20 segment. Meanwhile, the soft property prices evident in a weak house price index growth underscore developers' limited pricing power. On a slightly positive note, the household debt-to-GDP ratio has trended down to a healthier position of 81% at end-2022 from a peak of 93% (recorded in 2020).

The loan approval rate for 6MCY23 recovered and held steady at around the 43% mark but still paled in comparison to the 45%-51% seen during the upcycle in 2011-2014. On a brighter note, the quantum of absolute loans applied and approved has increased versus pre-pandemic levels, indicating that banks have the capacity to lend while the buying appetite for properties remains. Hence for a developer to capture prospective buyers, product location, size, layout design, type, price point and to a certain degree, brand recognition are key factors. All these must be considered while also keeping cost in check – something we find challenging given the stark rise in construction costs since 2020 (the largest cost component for a developer ranging c.40%-70% of GDV). We opine that property developers would struggle to pass on these higher construction costs to end buyers as price hikes will hurt take-up, putting the viability of the new launches at risk, or having to sacrifice margins.

Lagged effect of high raw material costs. In our view, property development margins, which held up well over the last two years, are likely to trend down in CY23. Property developers will bear the full brunt of contracts entered at high prices with their contractors in CY21-22 during the pandemic (amidst sky-rocketing prices of construction materials and labour shortages), as the delivery of these building contracts accelerates in CY23. That said, the recent easing and stabilising of said prices could offer some relief towards medium-term margin stress.

Unsold units trending down but remain high. Based on NAPIC’s latest 1QCY23 data, unsold units in circulation have decreased (which include overhang and unsold under construction units) to 142k units against the peak of 174k units recorded in 2021. However, the number is still high versus historical levels (i.e. in 2015–2017), dampening prices both in the primary and secondary markets. These unsold units mainly come from the high-rise segment (condo and serviced apartments) in KL, Johor and Selangor with the largest portion being priced >RM500k.

Balance sheet concerns linger. We remain extremely cautious over some developers’ high borrowing levels which would translate to higher financing costs and a potential liquidity crunch in the current interest rate upcycle. Already faced with a tough operating climate, these developers’ earnings will be hurt further by the high financial leverage. Besides, we note that developers holding large tracts of idle land acquired through borrowings will see the carrying cost of the land rising via the capitalisation of hefty interest cost in the current high interest rate environment, impeding the commercial viability of future launches. Such developers under our coverage include SPSETIA (UP; TP: RM0.38).

Maintain NEUTRAL. Under this highly challenging operating environment, we continue to prefer developers with strong cash flows that could anchor good dividends, namely, ECOWLD for its strong branding and mature townships, 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. Meanwhile, we also take this opportunity to downgrade MAHSING (TP: RM0.70) to MARKET PERFORM from OUTPERFORM given its recent share price rally whilst fundamentals are expected to remain unchanged.

Source: Kenanga Research - 11 Aug 2023