Developers
A Quick Review of 1H24

A Decent Start to FY24

Developers reported results aligned with expectations in 1Q24, with PBT surging 38% YoY. The stellar performance was driven mainly by SIMEPROP, whose PBT grew by 93% YoY due to higher sales volume, successful project execution, improved EBIT margin, and reduced losses from joint ventures. SPSETIA also experienced strong PBT growth of 56% YoY, supported by increased property development contributions from Vietnam and Johor, as well as higher land sale revenue.

1Q24 Property Sales Anchored by Land Sales

Developers’ 1Q24 aggregate property sales increased 11% YoY and 10% QoQ, driven by land sales (IOIPG and SPSETIA) as part of developers’ efforts to unlock land value. Excluding these land sales, developers’ sales would have declined by 12% YoY and 14% QoQ in 1Q24.

Despite this, developers remain confident in achieving their sales targets for 2024, given that 1Q sales have already accounted for 7-32% of each developer's respective sales target. By capitalising on the positive sales momentum of 1Q24, sizable launches line-up for 2H and implementing effective marketing strategies throughout the year, developers aim to sustain and further enhance their sales growth in the upcoming quarters.

News Flows on Infrastructure Development Is Gaining Momentum

We believe fiscal stimulus, such as infrastructure spending, has always been a key driver of growth in the property market. The Penang LRT project has received the go-ahead from the government, which is likely to boost the property market on Penang Island. The Penang LRT Mutiara Line, spanning 29km, has been reported to have 20 stations, including two interchange stations at Komtar and Penang Sentral.

Sector Wide Re-rating

We observe that all property stocks under our coverage recorded good positive returns, indicating that this was, in fact, a sector-wide re-rating. The KLPRP index surged 25.4% compared to the benchmark FBMKLCI index, which increased by 9.3%.

What to Expect in 2H24?

Data Centres Related Ventures Positive to Developers

Amid expectations of strong future demand from the artificial intelligence, cloud computing and IoT sectors, developers are capitalising on the trend by announcing deals related to establishing data centres. Overall, we view this development positively, as it will diversify revenue streams by utilising landbanks to generate recurring income from data centres, expedite the development of idle land, and enhance landbank value.

Revised MM2H Criteria Bodes Well for Property Market

In our view, the revised conditions for the Malaysia My Second Home (MM2H) programme holds the potential to significantly boost foreign real estate investments and potentially address overhang issues in the country. The latest revisions indicate the government's intent to create more favourable and competitive MM2H terms, aiming to rekindle interest among tourists and foreign investors in Malaysia. We believe this adjustment could attract more foreigners to our shores, positively impacting the real estate market. Moreover, by relaxing the MM2H program, Malaysia can continue to vie for highly skilled foreign individuals, fostering their contributions to the nation's growth through residency and investment.

Potential beneficiaries of these relaxations include developers engaged in upscale projects on Penang Island, such as E&O (Not Rated) and IJM Land (Not Listed), as well as those in the Klang Valley, such as IOIPG (Buy, RM3.00), SPSETIA (Buy, RM1.85), and SIMEPROP (Buy, RM1.57). In Johor, developers like SUNWAY (Buy, RM4.12), UEM Sunrise (Not Rated), and IWCity (Not Rated) may also see advantages from these improvements.

Budget 2025 Provides Policies Clarity

The forthcoming Budget 2025 is anticipated to be uneventful, with measures to support first-time homebuyers are expected to be implemented. However, we anticipate that there will be no significant incentives for developers. Similarly, it is unlikely that the Malaysian government will introduce property curbs due to the relatively modest increase in property prices. According to the National Property Information Centre (NAPIC), the annual growth rate of the Malaysian Housing Price Index (HPI) has decelerated, dropping from 5.1% in 3Q22 (the highest growth post-pandemic) to 0.5% in 1Q24. Between 1Q20 and 1Q24, the Malaysian HPI grew by an average of only 2.4%. Given the slower growth in home price appreciation, it is improbable that the government will implement additional punitive measures that could disrupt the housing market.

While we expect no direct goodies for developers, we expect more clarity on 1) incentives relating to the implementation of the Johor-Singapore Special Economic Zone (JS-SEZ) and 2) the timeline of the roll of the MRT3 and KLSingapore High-Speed Rail. All of these should help to boost property demand catalysed by the region's improved investment climate and economic opportunities.

Earnings Outlook

We project a 9.6% expansion in property sales in CY24, primarily driven by increased contributions from IOIPG's Singapore projects. For CY25, we expect property sales growth to moderate to 5.3%. Despite that, the absolute value of property transactions is expected to remain at record levels.

On average, the visibility of unbilled sales for developers under our coverage exceeds a 1x cover ratio of last FY's property development revenue. Overall, we foresee continued expansion in EPS growth of 16.8% in CY24, building on the encouraging 15.8% EPS growth recorded in CY23. This growth is supported by significant recognition from overseas projects, a return to normal domestic construction progress, and substantial earnings from land sales. Moving into CY25, we expect EPS growth to taper to 9.2% due to the high base effect.

Valuation

The imminent end of the BNM's interest rate hike cycle, alongside the potential for a boost in land values resulting from major infrastructure projects like HSR, RTS, and MRT3, as well as the establishment of special financial hubs and economic zones, should continue to bolster this positive sentiment. Furthermore, we expect the implementation of homeownerfriendly policies to add another layer of appeal to the sector.

Despite the significant rally in property counters, represented by the KLPRP index, year-to-date, which has lifted valuations to 0.69x forward P/Bk (above the long-term average of 0.65x), we see compelling reasons for the sector to trade above its historical mean. To put this into perspective, the sector’s valuation peaked at 1.16x during the previous upcycle in 2013 – see Figure 5.

In 2013, Malaysia's economic strength was primarily concentrated in the Klang Valley and Johor. Fast forward to 2024, and we now have two additional economic powerhouses: Penang and Sarawak. Moreover, the burgeoning Data Centre thematic play, which was absent during the 2013 upcycle, is now a significant growth driver.

Given these factors, we believe the current rally in property counters has further potential. Strong demand, favourable market conditions, and positive investor sentiment are likely to propel share prices even higher. The sector’s expansion into new economic regions and the rise of data centres provide a robust foundation for sustained growth, justifying a valuation above the longterm average.

All in all, we maintain our Overweight stance on the property sector, anticipating it to be a primary beneficiary of increased domestic activities, driven by a surge in infrastructure projects and investments.

Top Buy Picks for the sector are IOIPG, SIMEPROP and IBRACO. We like IOIPG’s (TP: RM3.00. ★★★★) quality pool of investment properties that anchor growth. Our valuation is based on P/Bk multiple of 0.7x against its CY25 BPS, slightly below the stock’s peak valuation of 0.71x since its listing in 2013. We also like SIMEPROP (TP: RM1.57, ★★★★★) for its leading market position to capitalise on the booming industrial property segment. We peg our valuation to 1.0x CY25 BPS, in line with the sector’s average implied CY25 P/Bk. Ibraco (TP: RM1.33, ★★), although relatively a small company, we like it for its strong position in Sarawak, which has led to robust property sales and the securing of construction projects with above-average profit margins.

MREITs

A Quick Review of 1H24

1Q24 NPI Driven by Improved Retail and Hotel Performance

The 1Q24 results for MREIT met expectations, with all three REITs under our coverage reporting earnings in line with our projections.

MREIT's Net Property Income (NPI) grew by 10% YoY, alongside an 11% increase in revenue. Improved retail and hotel segments drove this robust performance. The retail sector benefited from the economic recovery, while the hospitality sector saw increased occupancy rates and daily room rates, thanks to stronger domestic leisure, business travel, and MICE activities. Newly acquired assets, including QueensBay Mall for CLMT and KIPMall Kota Warisan for KIPREIT, also contributed to revenue growth.

Acquisition Mode Continues

MREITs have continued their expansion spree in the first five months of 2024, with all three REITs under our coverage announcing new acquisitions. CLMT is acquiring three freehold ready-built factories in Johor for RM27mn, while Sunway has proposed acquiring 163 Retail Park in Mont Kiara for RM215mn. Most recently, KIP REIT announced its largest acquisition since its IPO, acquiring DPulze Shopping Centre in Cyberjaya for RM320mn.

Share Prices Underperformed

Despite positive news on asset acquisitions, MREITs’ share prices underperformed the benchmark FBMKLCI. The overall MREIT index (represented by KLREI), SUNREIT and KIPREIT, underperformed the FBMKLCI by 3%, 8%, and 9% YTD respectively (see Figure 9). We believe the underperformance can be attributed to the market's concern that interest rates will remain high for an extended period.

In contrast, CLMT outperformed the benchmark by 12%, driven by its attractive valuation as a bargain buy and sustained recovery in operating performance.

What to Expect in 2H24?

A Resilient Retail Sector

Looking ahead into 2H24, the Malaysian economy is projected to maintain its strength, driven by robust domestic activities and a recovering export sector, forecasting a solid growth of 4.5%% in the gross domestic product. This positive trajectory bodes well for the retail segment, which is expected to thrive with sustained improvements in footfall and sales. The impending salary increase in civil servants, the pick-up in tourist arrivals and strong employment market are expected to support consumer spending in the coming quarters.

The supply of retail malls in Malaysia is set to increase further in 2024. While this will introduce new competition, these new malls are expected to enhance the variety and quality of retail offerings, thereby strengthening Malaysia's position as a premier retail destination. According to Retail Group Malaysia, the retail industry is projected to grow by 4% in 2024. The recent introduction of the Employee Provident Fund's (EPF) Account 3, or Flexible Account, which allows for withdrawals at any time for short-term financial needs, is anticipated to benefit members and, in turn, encourage consumer spending. Meanwhile, growing tourist arrivals should also bode well for retail performance.

Exciting Opportunities Await the Hospitality Sector as Travel Demand Surges

Tourism Malaysia confidently predicts that the number of tourists visiting in 2024 will surpass the impressive pre-pandemic figure of 26.1mn foreign visitors recorded in 2019. The growth in visitor numbers is anticipated to be significantly influenced by the increasing number of tourists from China and India. This can be attributed to the enhanced flight connectivity and the resumption of flights to Northeast Asia. In addition, implementing a 30-day visa-free entry starting from 1 December 2023 for visitors from China, India, Turkiye, Jordan, Saudi Arabia, Qatar, the UAE, Bahrain, Kuwait, Iran, and Iraq is anticipated to significantly boost Malaysia's tourism industry. We anticipate a surge in hotel occupancy rates and average daily room rates within the hospitality sector throughout 2024, propelled by increased demand for domestic leisure, corporate functions, and MICE events.

Industrial Properties Continue to be in High Demand.

However, the office segment is expected to grapple with an oversupply situation, facing challenges with rental and occupancy rates. Conversely, it is anticipated that there will be a sustained high demand for industrial properties and land. Regional logistics and warehousing are becoming increasingly important as the demand for last-mile delivery facilities, ecommerce retailing, and consumer products continues to grow. Acquisitions in this space will likely continue to be strong, as the MREITs we cover have stated their plans to expand their portfolio in the industrial property sector.

Higher Costs Could Dent Earnings

That said, the biggest challenges for MREITs in 2H24 could be the rising cost of living, which could affect the consumers' spending power and the increasing costs of doing business due to the subsidies' rationalisation (higher electricity tariff, fuel, etc.) and elevated financial cost. The tax-related policy introduced this year, namely the 8% new service tax rate, is also expected to impact consumer spending.

Earnings Outlook

Moving forward, we anticipate that the earnings pattern witnessed in the first quarter of 2024 will persist in the upcoming quarters as business operations resume normalcy. We forecast continued growth in the sector's 2024 Distribution Per Unit (DPU), expanding by 7.2% compared to a 3.3% growth in 2023.

The growth momentum is expected to be driven by 1) sustained growth momentum at the retail segment, 2) further recovery at the hotel segment, benefitting from an increase in travel and MICE activities, 3) contribution from newly acquired assets, 4) contributions from assets post-renovations and expansions, and 5) better operational efficiencies.

Valuation

When considering valuations based on price-to-NAV, MREITs are currently trading at an average forward multiple of 1.07x, which is 1.0 standard deviations below their 5-year average of 1.15x. While the higher for longer interest rates may cap upside on real estate capital values, we believe the current undemanding P/NAV multiple of MREITs likely accounts for most of these risks.

From a yield perspective, MREITs are currently offering an average forward distribution yield of 6.3%, surpassing their 5-year average of 5.3% by 100 basis points. In comparison, the 10-year Malaysian Government Securities (MGS) yield has been ranging from 3.79% to 3.99% in 2024, standing at 3.86% as of 29 June 2024. This translates to a distribution yield spread of 241 basis points, which is 1.5 standard deviations away from the 5-year average spread of 173 basis points,

Given the anticipated earnings improvements in FY24 and the attractive valuations within the sector, we maintain an Overweight stance. Our preferred pick is KIPREIT (TP: RM1.14, ★★★), with our TP derived based on CY25 target yield of 6.75%.

We like KIPREIT for its 1) diversified tenant mix cushions unexpected economic shocks, 2) attractive organic and inorganic growth prospects, and 3) above-sector average distribution yield.

Risks to our sector call include: (i) weaker-than-expected consumer spending, (ii) weaker-than-expected rental reversions, (iii) central bank increasing interest rates aggressively, and (iv) weaker-than-expected occupancy rates.

Source: TA Research - 2 Jul 2024