Maintain neutral: Our analysis shows that the Medium 40% (M40) and Bottom 40% (B40) households face difficulty in buying properties as the average house price is above both groups’ affordability range. Despite government incentives and policies to address this issue, the oversupply in the property market has continued to rise since 2012.
Likewise, property stocks have fallen from their peak valuations in 2014, some to the trough levels in 2008, making them attractively priced at the moment, in our opinion.
We expect the property companies in our coverage universe to post positive earnings growth in forward calendar year 2019 (CY19F). However, rising interest rates, Malaysia’s slowing gross domestic product (GDP) growth and unfavourable government policies, will limit share price upside, in our view, and the sector is unlikely to be rerated to peak levels last seen in 2014.
We do not see much room for housing loan growth given the existing low interest rate environment, limited buyer’s affordability and possible interest rate hike. Restrictive government policies are still in place and we do not see any incentive for consumers to purchase property given the weak rental market and subdued property market. We expect the housing market to remain challenging in the near term, unless there is a meaningful surge in household income, decline in house prices or more positive measures are introduced.
The property sector has garnered more interest lately due to its attractive valuations, but we believe the sector is cheap for a reason and this could be a false dawn. We believe developers could miss their new property sales targets for CY18F, and are likely to set lower new sales targets for CY19F. We think this would signal that the 2019 property market is likely to see lower new property sales and weaker buying sentiment.
Sime Darby Property Bhd (“add”, target price: RM1.29) remains our top pick as it has shown continuous improvement in its property development division and new property sales since its demerger in Nov 2017.
We believe the group’s healthy balance sheet and massive land bank are advantages in addressing the change in future product demand. — CGSCIMB Research, Jan 8