KUALA LUMPUR (July 6): The Malaysian property sector is expected to see its earnings recover 38% year-on-year (y-o-y) in 2021 from a low base, with digitalisation efforts cushioning the impact of the various lockdowns implemented this year, according to UOB Kay Hian.

In a note, analyst Chloe Tan said there could be a short-term recovery rally towards the fourth quarter of the year (4Q21) when the country attains herd immunity and as the economy reopens.

She noted that developer earnings for 2Q21 and 3Q21 are expected to be sluggish amid the closure of sales galleries and a slowdown in loan processing.

“Property launches were also halted due to uncertainties. A double whammy came as all construction activities in [affected] Selangor and Kuala Lumpur areas were ordered to pause for two weeks starting July 3, 2021 following the enhanced movement control order (EMCO).

"Most developers’ construction sites were impacted, and this could delay progress billings in 2021. With the lockdown prolonged and tightened, we further slash our sector earnings forecast by 7% for 2021. However, we foresee a potential strong recovery in 4Q21 with a gradual economic reopening as evidenced in 1Q21,” Tan opined.

The analyst viewed that the recovery in earnings will be supported by a 9% increase in sector revenue, improved earnings before interest and tax (EBIT) margins and the inclusion of Mah Sing Group Bhd’s glove earnings. Also contributing to higher sector earnings would be a forecast RM64 million core profit for UEM Sunrise Bhd versus a core loss seen in 2020.

In 2022, Tan expects sector earnings to grow by 49% y-o-y given the catch-up in construction work.

“Importantly, asset monetisation activities could be a key theme for the year in a soft property market. This could include non-strategic land sales, stake sales of non-core businesses, etc,” she opined.

She believes that developers can better weather the storm through digitalisation efforts, noting that since the middle of 2020, property companies had been accelerating their digital transformation to digitalise the end-to-end property buying process without buyers’ physical presence.

This would serve to accelerate property sales conversion rates as well as improved margins for 2021 amid lower operating expenditure (opex), particularly cost savings from marketing and administration expenses given the wide adoption of online platforms, she added.

She stated that mortgage approval rates grew two percentage points month-on-month (m-o-m) to 36.4% in May, despite the partial lockdown, which was higher than the 32.6% a year prior.

“Notably, mortgage applications and approval value remained close to historical peaks by rebounding over 200% y-o-y. This continued to be driven by pent-up demand, low interest rates and the ongoing Home Ownership Campaign (HOC), and we believe it would shape up again when the economy reopens,” Tan added.

Tan maintained her “market weight” call on the sector, noting that in the near term, she expects the sector to trade sideways when developers report weak sales and earnings.

“We foresee pent-up demand towards 4Q21 as evidenced in 1Q21, given: a) herd immunity by end-2021; b) the economy reopens; c) a low-rate environment; and d) the HOC. The sector is trading at 1SD (standard deviation) below its five-year mean P/B (price-to-book), while the stocks under our coverage are trading at 60%-70% discounts to their RNAV (revalued net asset value).

While the depressed valuations should have fairly reflected the long-term structural concerns, we expect to see trading upside towards 4Q21, considering ample market liquidity and as the economic reopening could again catalyse a rotational play into the cyclical sectors. Top picks: Sunway Bhd (target price [TP]: RM2.25) and S P Setia Bhd (TP: RM1.30),” she viewed.

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