Challenging Days Ahead For Property Sector, Strong Cash Flow Developers Will Reign

According to Kenanga research, there was a slight sequential deterioration in the recently concluded 4QCY22 results season with 14%, 71%, and 14% coming in above, within and below the forecasts vs. 29%, 57% and 14% during the preceding quarter, however the house notes that theey were not alarming.

Sime Property was the only company that beat forecast thanks to bumper billings and high margins in 4QFY22, while SPSETIA was the only company that missed our forecast as the earnings contributions from its Australian developments (which has lumpy contributions upon completion) were lower-thanexpected.

On a brighter note, all companies met expectations in terms of CY22 sales, as loan approval rates improved alongside the economic recovery, with SIMEPROP even beating assumptions. The developer beat expectations with right products launching at the right price within their matured townships coupled with efficient use of various marketing initiatives to reach its target market.

As for CY23 sales and margins outlook, Kenanga believes the sectors prospect is likely to be tougher amidst higher
interest rates and rising inflation resulting in weaker consumers’ big-ticket items purchasing power. This could potentially cause developers to defer their planned launches as the inability to raise prices amidst high construction costs could pose earnings risks. Meanwhile, developers’ margins which had held up well over the last two years are likely to trend down in CY23. They will feel the full brunt of contracts entered at high prices with their contractors in CY21-22 during the pandemic (amidst sky-rocketing prices of construction materials and labour shortages), as the delivery of these building contracts accelerates in CY23.

The house maintains a neutral call on th sector with limited room to raise prices amidst the declining price affordability to buyers and unabated construction cost inflation, players may have to cut back or hold back on new launches. On one hand,
share prices of property companies could have found the bottom (as most of them only trade at a fraction of their RNAV). On the other hand, there is no re-rating catalyst in sight.

Under this highly challenging operating environment, Kenanga picks developers with strong cash flows that could anchor good dividends, namely, ECOWLD for its strong branding, and IOIPG for the hidden value in its prime investment properties in the Klang Valley, Singapore and China that could potentially be unlocked via a REIT.

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