Stay Selective Amid Lack Of Near-term Catalysts

Developers’ 9M21 earnings were largely in line except for Mah Sing and UEMS. The increase in material cost has had minimal impact on developers. The anticipated robust sales in 4Q21 with pent-up demand could lead to a strong earnings recovery in 2022. However, sales may normalise or potentially contract in 2022 amid a lack of catalysts. Earnings could tail off thereafter. Back testing suggests rate hikes could negatively impact sector performance. Maintain MARKET WEIGHT. Top pick: Matrix Concepts.

WHAT’S NEW

9M21 earnings largely in line. In 3Q21, developers’ earnings were mostly in line with the exception of Mah Sing on lower-than-expected contribution from gloves, and UEM Sunrise (UEMS) amid widened losses due to operational inefficiency. Despite the increase in building material cost, developers’ margins were firm in this quarter due to their strong bargaining power, while some projects do have cost past-through clauses. All in all, the sector’s 9M21 earnings of RM766.5m represents a 27% yoy recovery on the back of improved progress billings (revenue grew 16% yoy) and growing EBIT margin (+3.2ppt yoy). While 9M21’s earnings account for 66% of our full-year forecast for the sector, we deemed results to be largely in line as the resumption of construction activities will see earnings catching up in 4Q21.

Earnings recovery to spill over to 2022… After the results, we have reduced 2021 sector’s earnings by 9% as we have removed Mah Sing’s glove contribution for 2022 and we assumed a RM62m loss for UEMS (vs a RM30m net profit). Nevertheless, we expect 4Q21’s property sales to rebound strongly with the economic reopening-fuelled pent-up demand, based on the recovery seen in 1Q21 and higher mortgage application and approval values in Oct 21 (see chart). This should result in stronger earnings in 2022 (we project 64% yoy growth, vs flattish yoy growth in 2021), backed by developers’ strong unbilled sales.

…but could tail off in 2023? While no statement was made on the Home Ownership Campaign (HOC) extension during Budget 2022, the industry is expecting the government to announce it towards end-21. This might induce front-loading of purchases in Nov-Dec 21. Couple with an anticipated rate hike and unexciting Budget measures, this may lead to a base normalisation on property sales, or potentially a contraction in 2022. Earnings could tail off in 2023. Excluding Sunway’s earnings that will be driven by overseas’ property revenue recognition, we have forecast a 4% yoy earnings decline for 2023.

Market could start pricing in a rate hike in 2022 and beyond. Historically, residential properties’ transacted volume has trended in tandem with mortgage approval value (see chart). Our back testing suggests mortgage approval values were lower (or exhibited negative growth) after interest rate hikes (see chart). This led to sector underperformance (see charts overleaf). While UOB Malaysia has projected one rate hike in 3Q22 (to 2%), we believe the market could start pricing in more rate hikes thereafter, in tandem with the US bond tapering effect. That said, the sector could underperform as consumers’ sentiments towards big-ticket items may fade.

ACTION

Maintain MARKET WEIGHT, stay selective. We are cautiously optimistic, and our top pick is defensive builder Matrix Concepts Holdings (BUY/Target: RM2.50) given its: a) above industry margin, b) attractive P/B vs ROE among its peers (RHS chart), and c) sustainable dividend yield at 6%. We also like Sunway Bhd (BUY/Target: RM2.25) for it being a proxy of the economic reopening and its strong healthcare growth trajectory. Meanwhile, we take the opportunity to upgrade Mah Sing to HOLD as its share price corrected close to our target price.