Lack of strong re-rating catalysts

We expect more muted sales momentum in 2022 given: 1) the absence of HOC that drove buying sentiments in 2019-2021, 2) political uncertainties ahead of/arising from GE15 could negatively affect the purchase of big ticket items and potentially cause delays in project approvals and 3) potential interest rate hikes from 4Q22. Profit wise, developers’ margins could be hurt by higher raw material costs but impact remains manageable for now. Maintain NEUTRAL. We prefer sector leaders – SPSB, ECW.

Our concerns for the top-line…

While sales are expected to improve as economy is recovering post-2021’s lock-downs, we see several hindrances to sales including potential interest rate hikes (MIB economics team expects OPR to be raised by +25bps, to 2.0%, in 4Q22) and political uncertainties ahead of general election (GE15) that could negatively affect the purchase of big-ticket items and potentially cause delays in project approvals. Elsewhere, to our (negative) surprise, there is no extension of the Home Ownership Campaign (HOC)
after it expired on 31 Dec 21. To some extent, HOC did help to boost the buying sentiments in 2019-2021.

… and the bottom-line

While sales momentum has been strong since 2H20, it is largely at the expense of lower margins on lower pricing as developers’ focus remain on cash flow recovery. Elsewhere, operating margin would be hurt by higher raw material prices (+12-20%) and additional costs e.g. stamp duties for properties priced above MYR500k/unit after the end of HOC, if developers decide to absorb the additional stamp duties in order to stay competitive in pricing.

Maintain NEUTRAL; lack of re-rating catalysts

While we are holding to our belief that 2022 sales should perform better as the economy recovers, we think the positives have been priced in at current valuations. The sector remains trading-oriented. We advocate investors to be selective and prefer sector leaders i.e. SPSB and ECW for their more diversified/creative products and strong management teams.