FOR the recently concluded quarter two calendar year 2024 (2QCY24) results season, property stocks under Hong Leong Investment Bank (HLIB)’s coverage showed mixed outcomes. 

Of the eight stocks covered, SimeProp exceeded expectations, while four others - Sunway, Matrix, Mah Sing, and OSK - were inline. 

However, IOIPG, SP Setia, and UEMS fell short of expectations. IOIPG reported lower-than-expected results due to losses from its Singapore JV and weak China sales, while UEMS struggled with slower project progress and reduced sales due to the absence of new launches.

This quarter also saw an unanticipated loss provision for an office building in Battersea. This provision was made for the projected rental income shortfall under a rental guarantee agreement. 

SimeProp assured investors that this is a one-off event, with potential for a write-back if the office building’s performance improves. Due to this provision, SP Setia missed expectations. 

On the other hand, despite this provision, SimeProp beat expectations, buoyed by land sales and solid operational results coming from its robust sales and good site progress.

In 2QCY24, aggregate sales for our coverage reached RM4.01bil, bringing the first half calendar year 2024 (1HCY24)’s sum to RM7.86bil. 

The 1HCY24 decline in sales was due to stronger oversea sales recorded last year by UEMS (Melbourne en-bloc sales, RM874m), Sunway (Singapore) and OSK (Melbourne). Year-to-date domestic sales remained strong. 

Launch activity slowed, with RM5.81bil in launches during 2QCY24, bringing the 1H24 total to RM8.18bil. 

This was due to the large launches from Sunway in Singapore and UEMS in Klang Valley in the prior year. Aggregate unbilled sales eased slightly by -1.2% quarter-on-quarter (QoQ) to RM20.32bil. 

Despite several misses, core earnings in 2QCY24 were strong. Aggregate core earnings rose to RM1.02bil, lifting 1HCY24 earnings to RM2.11bil. 

Notably in 2QCY24, IOIPG and SimeProp put up a sizeable amount of new launches in the domestic market worth RM1.70bil and RM1.51bil, respectively.

The upcoming Budget focus will likely remain on affordable housing, potentially expanding Residensi Madani nationwide beyond its current coverage in KL and Putrajaya. 

Private developers in the affordable segment could benefit by participating in these initiatives, similar to how Mah Sing was involved in the Residensi Madani project in Taman Desa.

The upcoming Budget could also shed some light on the government’s stance on where we are in the data centre (DC) investment cycle, taking cues from the tone and policy direction in the Budget. 

HLIB foresees three possible outcomes, the supportive measures that could encourage further DC investments, cooling measures such as stricter approvals or higher utility rates to manage the sector’s expansion, or no major policy changes, which is viewed as the most likely scenario. 

Given the current momentum in DC investments, particularly from global players like Amazon and Microsoft, the government is unlikely to implement restrictive policies that could deter growth. 

Any supportive measures would benefit developers with exposure to the DC sector, particularly Mah Sing and SimeProp, as well as those with significant land banks in DC hotspots like Johor and Selangor.

Global tech giants like Amazon, Google, Microsoft, and ByteDance are announcing investments in Malaysia, which is something unheard of in the past. 

These companies are rapidly expanding their DC capacity to support AI development, prioritizing speed to market over capital spending. 

This trend benefits property developers and landowners, as these firms are willing to purchase land at competitive prices to meet their expansion needs. 

The RM160bil in investments approved by MIDA during the first half of 2024 reinforces the strong momentum in investment activity. 

Industrial developers and office owners are set to benefit first from this influx, followed by residential developments, which will gain from spill-over economic effects and the easing of housing supply pressures as developers diversify into industrial and commercial projects.

“We maintain our OVERWEIGHT rating on the sector as we think that a multi-year upcycle is now set in motion,” said HLIB.

Property developers are the nation builders that lay the bricks and foundation of the economy. 

“Thus, we expect them to perform well in this new era of growth in Malaysia supercharged by robust investment activities. Our sector top picks are IOIPG, OSK, SimeProp and Sunway,” said HLIB. - Sept 11, 2024 

https://focusmalaysia.my/property-sector-expected-to-perform-well-on-the-back-of-robust-investment/