KAF Research foresees sales, earnings recovery for property sector next year

KUALA LUMPUR (Dec 15): KAF Research expects the property upcycle to gain momentum as the Covid-19 pandemic appears likely to transition to an endemic soon.

The research house's analyst Izzul Hakim Abdul Molob said in a Wednesday (Dec 15) note that residential volume has picked up in the nine months of 2021 (9M21), with higher average transacted price at RM389,000 a unit (pre-pandemic: RM345,000).

“We believe the property upcycle will continue to strengthen and stronger sales would follow,” he said.

According to him, developers’ 9M21 sales are already ahead of expectation, despite the lockdown and enhanced movement control order (EMCO) in the third quarter of 2021 (3Q21).

He noted that 4Q21 would likely be a stronger quarter from the lifting of economic restrictions, and this may be followed by a higher pre-sales target for 2022.

“We maintain our pre-sales growth target for the developers by about 19% or about RM11.5 billion in 2022. Stronger sales growth would eventually trigger a narrowing in discount to the sector’s revalued net asset value (RNAV). We expect 2022 sales to be the strongest since the downcycle that began in 2016,” he said.

He also noted that property stimulus like the Home Ownership Campaign (HOC) had encouraged home purchases since it was first announced in July 2020 during the pandemic.

“As we approach the endemic stage of Covid-19, one of the avenues to reflate the overall economy is to continue to extend the stimulus to the property sector. This is because property has a multiplier effect on the overall economy, including banking, insurance and construction,” he said.

Although no official pre-sales target has been announced by developers as yet, he said in general, they are looking at stronger pre-sales in 2022 from their more aggressive planned launches in 2022.

“Their working assumptions exclude the HOC extension. Any easing measures like the extension of HOC would be an added catalyst to a stronger property outlook in 2022,” he said.

Against a backdrop of the reopening of the economy, he expects interest in property companies to follow suit.

According to him, during a property upcycle, developers typically trade at around a 10% discount to 50% premium to RNAV.

With the exception of a few, most developers are trading at 60-80% discount to their RNAVs.

“Given the steep discount to the developers’ book value and RNAV, we believe that current valuations are attractive. We believe re-rating still has a long way to play out,” he said.

He maintains his "overweight" stance on the sector with his top picks: S P Setia Bhd (target price [TP]: RM2), Matrix Concepts Holdings Bhd (TP: RM2.60), Mah Sing Group Bhd (TP: RM1.12), and LBS Bina Group Bhd (TP: 60 sen).

He, however, maintained his "hold" recommendation on UEM Sunrise Bhd with a reduced TP at 39 sen (from 47 sen).

“Despite its sheer size (in terms of landbanks), most of them are in Johor (about 75% of the group’s remaining gross development value). We do not foresee any major catalyst from the southern region to support the recovery of Johor’s property market.

“It would take some time for the management to turn around its operation by shifting its focus to Klang Valley. Despite the potential earnings recovery in 2022 (from a potential loss in 2021), we expect minimal earnings contribution to the sector’s overall earnings,” he said. 

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