Analysts mixed on property sector, affordable housing play favoured

This article first appeared in The Edge Malaysia Weekly, on April 18, 2022 - April 24, 2022.
Analysts mixed on property sector, affordable housing play favoured
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GIVEN the uneven economic recovery in the aftermath of a global health crisis, analysts are maintaining a neutral stance on property stocks while keeping an eye on developers with affordable and landed residential offerings.

In an April 8 note, Hong Leong Investment Bank Research analyst Tan Kai Shuen says much of the property sector dynamics had changed compared with the previous year, owing to the pickup in sales and construction activity following the easing of lockdown restrictions, ending of the Home Ownership Campaign (HOC) last December, rising cost of living and lower household income, inflationary pressures on commodities and building materials cost, border reopening in April, anticipated rate hike and return of capital inflow from foreign investors.

“Against this backdrop, we anticipate an uneven recovery among property developers. While pockets of opportunities have emerged, some players will stand to benefit more from these factors,” Tan says.

“The affordable segment will benefit from the ending of the HOC, rising cost of living and lower income spending power. Apart from that, we also favour developers that outsource their construction jobs with healthy cover ratios, provide decent dividend yields and have a healthy net gearing ratio as well as strong environmental, social and corporate governance profiles and ratings.”

Tan’s top picks of developers that offer affordable homes priced below RM500,000 are Lagenda Properties Bhd, with 100% exposure, Matrix Concepts Holdings Bhd (65%) and Mah Sing Group Bhd (about 60%).

“All three companies enjoyed healthy average take-up rates for their products, signalling positively that their launches are matching the local housing demand,” he says.

Tan points out that while most property developers have set either a flattish or lower sales target for financial year 2022, Mah Sing and Lagenda are setting a higher sales target of 25% and 20% respectively, compared with the previous financial year, indicating their optimism and confidence in the market.

Tan also has Sunway Bhd and Sime Darby Property Bhd as his sector picks.

RHB Research senior analyst Loong Kok Wen and KAF Research analyst Izzul Hakim Abdul Molob also like Matrix Concepts’ strategic exposure to affordable landed township developments. The group’s Sendayan developments — comprising Bandar Sri Sendayan, Ara Sendayan and Tiara Sendayan in Negeri Sembilan; and Bandar Seri Impian (BSI) in Kluang, Johor — continue to chalk up strong sales as demand for affordable landed residential properties in Negeri Sembilan, particularly Seremban, remains robust.

“Property developers tell us that even Klang Valley dwellers are buying into Negeri Sembilan properties to live in rather than for investment. Matrix Concepts’ sales continue to grow, which is impressive, considering its smaller land bank compared with that of larger peers,” Izzul tells The Edge. He has a “buy” call on the stock with a target price (TP) of RM2.60 per share.

The company’s generous dividend payout of more than 40% and its net gearing of 4% to 5%, which is significantly lower than the industry average of more than 35%, have garnered investor interest.

Its 12-month trailing dividend yield of 5.47% is among the highest of the property developers listed on Bursa Malaysia.

RHB Research and HLIB also have “buy” calls on Matrix Concepts, with TPs of RM2.66 and RM2.54 apiece respectively.

RHB’s Loong also has “buy” calls on Sime Darby Property (TP: 75 sen) and IOI Properties Group Bhd (TP: RM1.38).

Loong says: “For IOI Properties, apart from its property development, we believe its recurring income stream will be strengthened significantly from FY2023, with the upcoming opening of IOI City Mall Phase 2 in June or July as well as the completion of Central Boulevard office towers in Singapore next year. Assuming a conservative rental rate of S$10 to S$11 psf, the office towers can generate RM350 million to RM450 million in rental income annually during the initial years. This should form a good earnings base for the company to raise its dividend payout in the future,” she says.

HLIB Research is estimating a 25-basis-point hike in the overnight policy rate to 2% in 4Q2022, which it expects will affect developers that have a high net gearing, owing to the higher interest expense.

“As such, we favour developers with healthy net gearing levels such as Lagenda, Matrix, Mah Sing and Sime Darby Property. These developers have a high committed dividend payout, as investors would prefer cash in hand, and the healthy dividend yield will provide downside support to the share price,” HLIB’s Tan says.

Meanwhile, RHB’s Loong believes the property sector will benefit from the reopening of the economy and international borders.

She says: “We see some potential trading opportunities, as sector valuations are undemanding, at a 64% discount to [revised net asset value]. Valuations for a few big-cap property stocks such as IOI Properties and Sime Darby Property have yet to revert to pre-pandemic levels.

“Recent news flow on the construction sector and green light for the Mass Rapid Transit 3 (MRT 3) may have piqued investor interest on major construction stocks. We are cautious, however, on developers’ earnings prospects, given the stubbornly high construction costs, from the spike in the prices of various commodities.”

Meanwhile, according to the National Property Information Centre’s Property Market Activity 2021 report, the average value of transactions in 2021 rose 21.7% to RM144.87 billion, from RM119.08 billion in 2020 and 2.45% from RM141.40 billion in 2019.

“That makes for a positive outlook on the property sector ... when the average transacted price is higher than pre-Covid-19

levels,” says KAF Research’s Izzul. “In addition, Bank Negara Malaysia’s mandate for banks to keep up their loan growth will also benefit the property market. Residential sale loan approvals in January and February were strong. In fact, the 40% approval rate in January for residential loans was an improvement from the 34%-to-35% level pre-pandemic.”

He believes affordable housing sales will remain robust, thanks to the government’s stamp duty waiver for Malaysian citizens buying their first residential property valued up to RM500,000, on the condition that the sales and purchase agreement is executed between Jan 1, 2021, and Dec 21, 2025.

“Concerns of rising interest rates can be partially offset by an improvement in the job market,” Izzul says.

On the macroeconomic front, RHB’s Loong believes rising inflationary pressure may dampen household disposable income, which in turn can negatively affect property demand, as it is considered big-ticket and non-discretionary.

“We believe, however, that the timing of [a general] election as well as expectations of election results may swing sentiment,” she says.

 

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