1) Property Developers

Review

Developers’ 1Q24 results aligned with expectations, as five out of eight developers under our coverage (IOIPG, SIMEPROP, SUNWAY, MAHSING and IBRACO) reported earnings in line with our projections. GLOMAC trailed expectations largely due to weaker-than-expected development margins, while PARAMON fell short due to lower-than-expected progress billings. SPSETIA beat expectations due to stronger-than-expected revenue recognition from ongoing projects.

The sector’s 1Q24 PBT surged 38% YoY, largely driven by SIMEPROP, whose PBT grew by 93% YoY due to higher sales volume, successful project execution, improved EBIT margin, and reduced losses from joint ventures. SPSETIA also experienced strong PBT growth of 56% YoY, supported by increased property development contributions from Vietnam and Johor, as well as higher land sale revenue.

Sequentially, the sector 1Q24’s PBT decreased 14% compared to 4Q23. Such performance is expected, as the fourth quarter historically tends to be the strongest, benefiting from improved sales conversion and cumulative progress towards year-end targets.

In terms of property sales performance, the sector’s 1Q24 aggregate property sales increased 11% YoY and 10% QoQ, driven by land sales (IOIPG and SPSETIA) as part of developers’ efforts to unlock land value. Excluding these land sales, developers’ sales would have declined by 12% YoY and 14% QoQ in 1Q24.

Considering the sector’s 1Q24 sales performance and the new launch lineup for 2H24, we believe developers are on track to achieve their 2024 sales target.

Outlook

We foresee developers poised for a stronger performance in 2024. In addition to favourable monetary and government policies, Malaysia's resilient growth, supported by increased domestic demand and improved labour market conditions, is anticipated to impact the property sector positively. Furthermore, we anticipate that margin pressures will ease due to stable raw material costs and improved labour availability. We expect positive developments related to major infrastructure projects and the establishment of special financial and economic zones, especially in the Johor region, coupled with the implementation of homeowner-friendly policies to underpin the sector's future performance.

Amid expectations of strong future demand from the artificial intelligence, cloud computing and IoT sectors, developers are capitalising on the trend by announcing deals related to establishing data centres. Overall, we view this development positively, as it will diversify revenue streams by utilising landbanks to generate recurring income from data centres, expedite the development of idle land, and enhance landbank value.

Recommendation

We reiterate our Buy recommendation for all the developers under our coverage. Maintain Overweight in the Property sector.

2) Real Estate Investment Trust (REITs)

Review

MREIT’s 1Q24 results met expectations, with all three REITs under our coverage reporting earnings that were in line with our projections.

In 1Q24, MREIT's NPI grew by 10% YoY, accompanied by an 11% increase in revenue. The robust performance was driven by improved retail and hotel segments. Retail benefited from economic recovery, while the hospitality sector saw increased occupancy rates and daily room rates, attributed to stronger domestic leisure, business travel, and MICE activities. Newly acquired assets, including QueensBay Mall for CLMT and KIPMall Kota Warisan for KIPREIT contributed to revenue growth.

Outlook

The supply of retail malls in Malaysia is set to increase further in 2024. While this will introduce new competition, these new malls are expected to enhance the variety and quality of retail offerings, thereby strengthening Malaysia's position as a premier retail destination. According to Retail Group Malaysia, the retail industry is projected to grow by 4% in 2024. The recent introduction of the Employee Provident Fund's (EPF) Account 3, or Flexible Account, which allows for withdrawals at any time for shortterm financial needs, is anticipated to benefit members and, in turn, encourage consumer spending.

Tourism Malaysia forecasts that tourist arrivals in 2024 will exceed the pre-pandemic level of 26.1mn foreign visitors recorded in 2019. This growth is expected to be driven particularly by visitors from China and India, thanks to improved flight connectivity and the resumption of flights to Northeast Asia. Additionally, the introduction of a 30-day visa-free entry, effective from 1 December 2023, for visitors from China, India, Turkiye, Jordan, Saudi Arabia, Qatar, the UAE, Bahrain, Kuwait, Iran, and Iraq is expected to further stimulate Malaysia's tourism industry.

In all, we expect a continued recovery in REITs' performance aligning with economic expansion. Forward earnings will be underpinned by 1) sustained growth momentum in the retail segment, 2) further recovery in the hotel segment and 3) contribution from newly acquired assets. MREITs have been on an expansion spree in the first five months of 2024, with all three REITs under our coverage announcing new acquisitions. CLMT is acquiring three freehold ready-built factories in Johor for RM27mn, while Sunway has proposed acquiring 163 Retail Park in Mont Kiara for RM215mn. Most recently, KIP REIT announced its largest acquisition since its IPO, acquiring DPulze Shopping Centre in Cyberjaya for RM320mn.

That said, the biggest challenge for MREITs in 2024 could be the rising cost of living, which could affect the consumers' spending power and the increasing costs of doing business due to the rationalisation of subsidies and elevated financial costs. The two tax-related policies to be introduced this year, namely an 8% new service tax rate and high-value goods tax, are also expected to impact consumer spending.

Valuation and Recommendation

We maintain our Buy recommendation for all three MREITs under our coverage. We are Overweight in the REIT subsector.

Source: TA Research - 5 Jun 2024