Surprise 25bps interest rate cut. Bank Negara Malaysia has cut its key interest rate to 3.00% from 3.25% presently, the first cut since February 2009. This surprise interest rate cut was the first after the 2008–09 Global Financial Crisis. The 25 basis points (bps) cut is positive for property sector as this will bolster the flagging demand currently. We estimate that the 25 bps would boost affordability i.e. reduce mortgage amount by c.3.2%. That said, the overall impact depends on banks’ pricing of the risks that affects credit spreads and margin of financing (especially for new loans). All told, it is positive for property sector but weak demand currently is still a concern but sales recovery, which is expected in 2H2016 could provide a stronger rerating catalyst for the sector.

Maintain Overweight. Granted, demand is still weak due to concerns over slowing economy and tightening credit. However, with more launches expected in the next few months, we expect property developers to register better sales as compared to 1H2016. As mentioned in our report earlier, we believe that the sector is already excessively punished as we think price corrections, if any, will not be excessive. Also, most of the property developers’ earnings in the near term also underpinned by healthy unbilled sales both locally and from overseas.

In addition, we still believe that property stocks are trading near undeserving distressed valuations albeit recovering somewhat to trade at -1SD below the mean at c.0.7x discount to book value currently. As for our coverage, we continue to stick with companies that have low holding costs i.e. cheap landbank and strong balance sheets. With some trading even more than 50% discount to book value, we believe holding the stocks would give investors exposure into real assets cheaper than physical properties which should move up in tandem with inflation in the long run. Also, demand is expected to be underpinned by the young demographics, rising income and improved connectivity from infrastructure spending in the country. As for the counters under our coverage, we maintain our recommendations except for E&O which has moved close to our target price, and hence downgraded to Neutral

Source: PublicInvest Research - 14 Jul 2016