Property sector consolidation possible, with firms taken private, this year

TheEdge Thu, Jan 16, 2020 10:31am - 4 years View Original


Property sector
Maintain neutral:
We expect most property developers to report weaker sales in 2019 due to fewer property launches. However, their focus on reducing inventories over the past two years has paid off with the property overhang easing last year.

We expect property demand to see a slow recovery in 2020 given affordability issues and weak market sentiment, with a muted sector core earnings per share (EPS) growth of 6% year-on-year (y-o-y) in 2019 estimate (2019E) and 7% y-o-y in 2020E on the back of higher revenue and profit margins.

We believe property sales peaked in 2018 and started to ease in 2019 for most property developers. Several property developers including S P Setia Bhd cut their sales targets due to challenging local property market conditions, namely weak demand and stiff competition.

However, the Home Ownership Campaign (HOC) stamp duty waiver extension to end-2019 supported a recovery in housing demand. We believe Budget 2020 measures aimed at liberalising foreign ownership of condominiums and serviced apartments, introducing a government-supported rent-to-own scheme and recalibrating the real property gains tax will sustain the recovery in 2020.

The residential property overhang had fallen 3.8% year to date (YTD) to 31,092 units in the nine months of 2019, representing 25.7% of total units launched, while the total value of overhang units fell 5.5% to RM18.77 billion as at end-third quarter of 2019 (3Q19).

We expect sector core EPS to rebound 6% y-o-y in 2019E from a low base after an 18% y-o-y contraction in 2018. Sustained revenue growth and a slow recovery in profit margins should drive a core EPS growth of 7% y-o-y in 2020E. We believe the financial positions of most property developers improved with lower inventories, reducing their average net gearing to 0.38 times in 2019E from 0.4 times in 2018. The moderate net gearing level will allow most developers to weather the current industry slowdown.

We reiterate our “neutral” call on the sector as market conditions remain challenging. This is reflected in the current low sector valuations with an average 2020E core price-earnings ratio of 13 times and price-to-book ratio of 0.6 times.

This may spark an industry consolidation or major shareholders taking property companies private. We prefer developers with overseas property exposure and a strong financial position. Our top “buys” are Sunway Bhd, IOI Properties Group Bhd and UOA Development Bhd. — Affin Hwang Capital, Jan 15

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