This article first appeared in The Edge Financial Daily on March 11, 2020

Property sector
Maintain neutral: Sales figures in recent result releases show that most developers under our coverage achieved their respective financial year 2019 (FY19) sales targets, but note that S P Setia Bhd revised its target downwards to RM4.55 billion (from RM5.65 billion) when reporting its results for the second quarter ended June 30, 2019. Looking into FY20, most of the developers under our coverage have set a relatively flat target again, with the exception of Sunway Bhd (+27%) and UEM Sunrise Bhd (+77%). Overall, we remain cautious about the targets as the ongoing Covid-19 outbreak may potentially dampen sales.

Expectations for 2020 to remain a challenging year for property developers are now further strengthened by the Covid-19 outbreak as some developers have resorted to cutting down on property launch events in Malaysia. The impact would likely be the most apparent for IOI Properties Group Bhd as its property arm in China has essentially come to a halt given the mobility constraints in place, affecting its construction activities and potential sales activities.

As of now, developers have not confirmed any delays in launches but are monitoring the situation. Given that the outbreak outside of China has escalated recently, we do not discount the possibility of launch target revisions in terms of sales and gross development value taking place if the virus does not subside. Moreover, with expectations for Covid-19 to take its toll on the broader economy (our economics team is looking at a sub-3% gross domestic product growth rate in the first quarter of 2020), buyers may opt to wait before making property purchases.

With two overnight policy rate (OPR) cuts (to 2.5% from 3%) taking place recently, housing loan rates should also see a decrease, which would improve affordability for homebuyers. Our calculation implies that monthly instalments would be 5.8% lower, assuming that the average loan rate goes down in unison with the OPR cuts of 50 basis points.

With the absence of the Home Ownership Campaign, coupled with the recent change in government, homebuyers may resort to a wait-and-see stance in the first half of of 2020. We believe these factors may result in 2020 recording a slower growth in terms of transacted volume if developers do not maintain sufficient discounts to entice buyers. On the other hand, the lower-interest rate environment should provide some buffers in this challenging environment.

We continue to like Sunway (“buy”; target price [TP]: RM2.23) as an underappreciated property-construction conglomerate with mature investment properties, a growing trading and quarry division, and potential monetisation of its healthcare business.

We also like Matrix Concepts Holdings Bhd (“buy”; TP: RM2.25) as it rides on the affordable housing theme within its successful townships with cheap land cost and sustained property sales, coupled with potential job flows from its Indonesian venture. Its dividend yield of over 6% remains one of the highest in the sector. — Hong Leong Investment Bank Research, March 10