KUALA LUMPUR, Malaysia (July 6): According to UOB Kay Hian, the Malaysian property sector is predicted to recover 38 percent year-on-year (y-o-y) in 2021 from a low base, with digitization efforts softening the impact of various lockdowns applied this year. Analyst Chloe Tan wrote in a note that the country might see a short-term recovery bounce in the fourth quarter of the year (4Q21), when it achieves herd immunity and the economy reopens.
She predicted that developer earnings would be sluggish in 2Q21 and 3Q21 due to the closure of sales galleries and a slowdown in loan processing.
“As a result of the uncertainty, property launches were also halted.” Following the increased movement control order, all building operations in [affected] Selangor and Kuala Lumpur regions were ordered to halt for two weeks beginning July 3, 2021. (EMCO).
“Most developers’ building sites were damaged, and progress billings in 2021 may be delayed as a result.” We’ve slashed our sector earnings prediction for 2021 by 7% as the lockdown has been extended and intensified. However, we expect a robust rebound in 4Q21, as well as a progressive economic reopening, as seen in 1Q21,” Tan predicted.
A 9 percent increase in industry revenue, increased profits before interest and tax (EBIT) margins, and the inclusion of Mah Sing Group Bhd’s glove earnings, according to the analyst, will assist the earnings recovery. A anticipated RM64 million core profit for UEM Sunrise Bhd, compared to a core loss in 2020, would also contribute to improved industry earnings.
Given the catch-up in construction work, Tan anticipates sector earnings to climb by 49 percent y-o-y in 2022.
“In a soft property market, asset monetisation operations could be a prominent trend for the year.” This may include non-strategic land sales, non-core business interest sales, and so on,” she speculated.
She believes that digitalisation efforts will help developers weather the storm better, noting that property companies have been increasing their digital transformation to digitalize the end-to-end property purchase process without buyers’ physical presence since the middle of 2020.
She noted that this will help to increase property sales conversion rates as well as boost margins in 2021 due to decreased operating expenditures (opex), particularly marketing and administration costs, due to the widespread use of online platforms.
Despite the partial shutdown, she noted that mortgage approval rates increased two percentage points month-over-month (m-o-m) to 36.4 percent in May, which was higher than the 32.6 percent a year before.
“Notably, by rebounding over 200 percent year-over-year, mortgage applications and approval value maintained close to record heights.” Pent-up demand, cheap borrowing rates, and the ongoing Home Ownership Campaign (HOC) continues to fuel this, and we expect it will shape up again once the economy reopens,” Tan added.
Tan kept her “market weight” prediction on the sector, predicting that it will trade sideways in the near term as developers post dismal sales and earnings.
“Given: a) herd immunity by end-2021; b) the economy reopens; c) a low-rate environment; and d) the HOC, we expect pent-up demand in 4Q21, as indicated in 1Q21. The sector is trading at a 1SD discount to its five-year mean P/B (price-to-book), while the firms we cover are trading at 60 percent to 70% discounts to their RNAV (revalued net asset value).
While the poor valuations should have fairly represented the long-term structural concerns, we anticipate to see trade upside in 4Q21, given significant market liquidity and the possibility of a rotational play into cyclical sectors due to the economic recovery. Sunway Bhd (target price [TP]: RM2.25) and S P Setia Bhd (TP: RM1.30) are her top picks,” she said./n
