2020 was a very challenging year for the Malaysian property sector in view of COVID-19 and the measures taken to control it. But the problems faced by the property sector pre-date the COVID-19 pandemic.
The industry started the decade on a very positive note. But the Government soon instituted a number of cooling measures to reduce speculation such as banning the Developer Interest Bearing Scheme (DIBS) and increasing the Real Property Gains Tax (RPGT).
These have affected the sector both in terms of business performance as well as stock market performance.
As a brick-and-mortar industry, a significant part of the value is in the assets of the company. But the market has been discounting this. The price book value multiples for the property sector have been declining over the past few years as shown below. There is also a similar trend for the price earnings multiples.
If you are an investor in the Malaysian property sector, you can be forgiven for worrying about the light at the end of the tunnel.
The changes were not just in the median values but also in the distribution of the multiples as shown in the chart below:
- In 2021, 93% of the companies in the sector had price-to-book multiples of 1.0 or less. In 2016, it was 82%.
- In 2021, the distribution of PE (price-to-earnings ratio) was very skewed to the low end with 46% of the companies having a PE of less than 2.5. In 2016, only 30% had PE less than 2.5.
We can debate whether the differences in the valuations are due to declining market sentiments or declining business performance or both.
From a business performance perspective, however, the sector performance for the past few years is nothing to be excited about. There were declining revenues, profits and returns. The only positive item was an increasing cash flow from operations.
The industry average revenue grew from 2010 to peak in 2016/2017. It has declined since then as can be seen from the chart below. The chart compared the industry average revenue with the Housing Price Index (HPI) and the real gross domestic product (GDP) growth rate.
- From 2010 to 2019 (before the COVID-19 pandemic), the sector average revenue grew at a compound annual growth rate (CAGR) of 8.6%.
- During the same period, the HPI grew at a 7.9% CAGR while the GDP had a 5.1% CAGR.
Looking at the sector average revenue alone, you would conclude that the sector had a relatively good growth for the decade. But the sector’s average revenue does not show the full picture.
There are currently 99 companies under Bursa Malaysia’s property sector but I left out those without 10 years of listing history. As such the various metrics were based on 85 companies with financial data from 2010 to 2020.
When you dig into the industry performance, you will find that the results were driven by large companies. I have divided the sector into three based on the shareholders’ funds.
- Large: Those with shareholders’ funds greater than RM1 bil.
- Medium: Those with shareholders’ funds between RM300 mil and RM1 bil.
- Small: Those with shareholders’ funds of less than RM300 mil.
As can be seen from the chart below, the major revenue changes were seen among the large company group. The medium and small size groups had a relatively small growth in revenue.
If you were contemplating investing in the property companies, you would look at those within the large company group. The rationale is not just revenue. Among the various metrics, the large company group performance stood out.
First, in terms of profits, the average profits of the large companies far outweigh those of the other two groups. But as can be seen from the Average PAT (profit after tax) chart, the sector performance was such that the 2020 average profits were about the same as those in 2010.
This is not exactly an exciting performance. But at least if you had invested in the large companies, you had a better chance of being profitable in 2020.
Not surprisingly, the large company group had better return than the other two groups in terms of the return on equity (ROE) and return on assets (ROA).
You can see the declining returns for all the three groups over the past few years in the ROE and ROA charts below. For the large and medium groups, the returns in 2020 were lower than those of the 2010 levels.
If I breakdown the ROE using the DuPont analysis – ie into the profit margins, asset turnover and leverage – we have the following picture:
You can see that the profit margin accounted for most of the differences in the returns for the three groups.
Next, in terms of cash flow from operations, the large company group performance also stood out. In a sector where cash is critical, it is good to see that cash from operations were trending up. These were achieved despite the decline revenue, profits and returns.
What is the moral of the story?
Size matters when you are contemplating long-term investing in the property companies. The likelihood for a long-term investor is that you are going to experience the peak and trough of a property cycle. The large company group have demonstrated better resilience.
If nothing else, you can see that the PE performance of the large companies stood out as shown in the chart below. – July 23, 2021
Datuk Eu Hong Chew was on the board of I-Bhd from 1999 till 2020. As Group CEO, he led its transformation from a digital appliance manufacturer into the developer of i-City, the Selangor Golden Triangle.
The data for this article was extracted from the article that was first published under “Will the Malaysian Property industry turn around by 2024? on i4value.asia. Refer to the article for more details of the methodology and further analysis.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
Photo credit: PropertyGuru