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Thursday, July 4, 2019

Property - 2H19 Outlook: Still a Challenge

Author: HLInvest | Publish date: Thu, 4 Jul 2019, 9:20 AM

In the recently reported results, 5 out of the 7 companies under coverage came in within expectations, with Mah Sing performing below and MB World coming in above. On average, companies achieved c.18% of their full year sales target (with the exception of SP Setia) as the market is generally slower in the beginning of the year. We maintain our forecasts and NEUTRAL stance on the sector despite having 5 BUY calls out of the 7 companies under our coverage, due to the absence of near-term catalysts to warrant a re-rating in our sector call.

1H19 recap. In the recent results release, 5 out of the 7 companies under coverage came in within expectations, with Mah Sing performing below and MB World coming in above expectations. 1H19 saw more landbanking activities under our coverage compared to 2018, which suggests developers are beginning to prepare for new launches in the upcoming years. Sales figures for the recent results release showed that on average, companies achieved c.18% of their respective full year sales target and are maintaining sales targets for now, as the market is generally slowest in the beginning of the year while most planned launches will take place in 2H19.

Housing affordability still an issue. Based on our findings, the actual median price of houses in key states, namely Selangor, KL, and Johor are all above our estimated affordable range. Note that our affordable range is derived from the price range between the Median Multiple and Housing Cost Burden approach i.e. methodologies commonly used to measure housing affordability. In 2018, houses priced below RM300k made up the biggest proportion of transacted volume but we note that products at those prices generally do not provide sustainable margins for developers.

Notable trends. The number of overhang residential units increased to 32,313 units in 2018 from 10,181 units back in 2014 (+217%). Note that 62% of the overhang units are priced above RM300k, representing 88% in terms of value. With regards to the residential transaction volume, 2018 rebounded with a growth of 1.4% compared to an average annual decline of -5.7% during the 2014-2017 period. Monthly property loan applications and loan approvals were up YoY for the 4M19 period by 6% and 2.9%, respectively. We can expect these indicators to continue showing signs of growth in the near-term, as it will be further supported by the Home Ownership Campaign (extended to Dec 2019) and the cut in OPR.

Remain cautious. Despite the positive indicators, we believe these improvements can be largely attributed by the pent up demand from the “wait and see” approach taken during the GE14 period which led to a low base effect in 2017. As we note that houses priced below RM300k make up the biggest share of transacted properties in 2018, we expect demand for houses priced RM300k and above to remain challenging moving into 2H19.

Maintain NEUTRAL. We maintain our forecasts and NEUTRAL stance on the sector despite having 5 BUY calls out of the 7 companies under our coverage, due to the absence of near-term catalysts to warrant a re-rating in our sector call. However, we do not rule out a possible mild recovery of interest towards the sector given the trough valuations (coverage universe P/B at 0.77x or -2SD).

Top Picks. We continue to like Sunway (BUY, TP: RM2.18) as an underappreciated property-construction conglomerate with mature investment properties, growing trading and quarry division and potential listing of healthcare business. MB World (BUY, TP: RM2.75) is our small-cap pick given its first mover advantage to capture the spill over effect from the growth in the RAPID project in Pengerang and Desaru Coast.

Source: Hong Leong Investment Bank Research - 4 Jul 2019

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