‘NEUTRAL’ Call on The Property Sector: RHB Research

A ‘NEUTRAL’ call on the Malaysian property sector has been maintained by the research house.

The property sector should generally benefit from the re-opening of the economy and international borders. Hence, the research house holds the view that some potential trading opportunities as sector valuations are undemanding, at 64% discount to RNAV. Recent news flow on the construction sector and green light for the Mass Rapid Transit 3 (MRT 3) may potentially have a positive spillover on the sector.

However, the research house has cautioned the investors that developers’ earnings prospects may be affected, given the stubbornly high construction costs, from the spike in the prices of various commodities.

Potential sentiment spillover from construction sector. The research house holds the opinion that there could be short-term trading opportunities among the property stocks, as the sector is now trading at around 64% discount to RNAV – relatively unchanged since end-2021. Recent news flow on the takeover of highways as well as the go-ahead for MRT3 have stirred up investor interest on the construction sector. As such, it is expected that sentiment on the property sector may improve in the near term, while the sector’s cheap valuation is a good reason for investors to enter, especially those with a shorter investment horizon.

2022 sales targets are generally lower YoY. Developers have generally set a lower sales target this year (c.-10% YoY) after recording strong property sales in 2021. Last year, aggregate property sales grew around
40% YoY despite the rolling lockdowns in Jun-Aug 2021. In the view of the analysts’, 2022’s more conservative sales targets are probably due to the absence of the Home Ownership Campaign (HOC), expectations for an interest rate hike in 2H22, and rising inflationary pressure.

Re-sizing of product built-up area to mitigate rising cost pressure. Major commodity prices saw significant price hikes, including crude oil, steel bar, copper, aluminium, etc. The resulting price increases in cement, sand, tiles, and related products collectively added to the surge in total construction costs. Assuming the uptrend in commodity prices persists over the next 6-9 months, besides margin compression, hence the research house thinks developers will tend to be more prudent with their launches. Developers will likely re-size/re-design as well as maintain the selling prices and affordability of their products, or look for alternative construction materials that are cheaper in an effort to mitigate cost pressure.

Rising inflationary pressure and timing of election may swing sentiment. On the macroeconomic front, rising inflationary pressure may potentially dampen household disposable income. Given the market has just recovered from last year’s lockdown, demand for property may be negatively affected as property is deemed a big-ticket item that is considered non-discretionary. The timing of election as well as expectation of election results may swing sentiment.

Top Picks or the preferred picks of the research house for this sector are Matrix Concepts, Sime Darby Property and IOI Properties.

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