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Property sector 'neutral' despite challenging outlook, says AmInvestment Bank

KUALA LUMPUR (July 20): AmInvestment Bank Bhd (Ambank) maintained its “neutral” view on the property sector as its outlook for the next 12 months remains challenging due to the onset of the Covid-19 pandemic and the resulting Movement Control Order (MCO) to control its spread that has halted economic activities for almost two months.

According to its analyst Thong Pak Leng, he believed that consumer sentiment will remain weak for now, as they prioritise their spending on necessities and put big-ticket purchases such as properties on hold.

“Companies such as S P Setia, MRCB, Ecoworld, Titijaya Land and UEM Sunrise have many projects still in their early stages, hence we do not expect strong revenue recognition in the next 12 months.

“On the other hand, we remain cautious on the financial leverage of some companies as it is one of the key factors to their survivability during an economic downturn.

“Based on our data, the net gearing of developers under our coverage is still under control, averaging at about 36% while interest coverage remains strong at circa eight times,” he said in a note.

He expects the affordable segment to perform better, driven by the mass market, especially demand from young professionals and families due to continued urbanisation.

This trend, he said, is evident as most local property developers are focusing on this segment.

Thong also noted that the Penjana stimulus plan, which reintroduced the home ownership campaign that waives stamp duty on purchases of residential properties priced from RM300,000 to RM2.5 million, as well as real property gains tax for property sales from June 1, 2020 to Dec 31, 2020 is good news for developers.

“These key measures will improve the overall sentiment of house buyers and the residential property market in Malaysia. Maintain ‘Neutral’ on the sector,” he said.

“We maintain our ‘Neutral’ view on the property sector as we do not anticipate earnings surprises in the short to medium term. Our top pick for the sector is IOI Properties Group Bhd (‘Buy’, FV: RM1.52) which is banking on a strong contribution from its property development projects, particularly in China and Singapore,” he said.

As for the long-term outlook for the real estate investment trusts (REITs), Thong held a positive view given the diminishing rate of Covid-19 cases in Malaysia, while several stimulus plans by the government provide greater earnings visibility.

“Furthermore, Malaysian REITs’ dividend yields of more than 4% on average for FY20 and more than 5% for FY21 and beyond, offer attractive returns compared to the current low interest rate environment.

“We have ‘Buy’ recommendations on Pavilion REIT (FV: RM1.99) and YTL Hospitality REIT (FV: RM1.36),” he noted.

At the time of writing, IOI Properties was unchanged at 93.5 sen, valuing the company at RM5.15 billion. Meanwhile, Pavilion REIT was also unchanged at RM1.60, valuing the trust at RM4.9 billion, whereas YTL Hospitality REIT also remained at RM1.01, giving it a market capitalisation of RM1.74 billion.

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