AMINVESTMENT Bank Research has maintained its neutral view on the property and real estate investment trust (REIT) sectors as the overall sentiment remains weak and it takes time for the economy to regain momentum. The Covid-19 outbreak has caused a major upheaval in the global economy.
In a note on April 9, the research house said its top picks for the sector are Sunway Bhd with a fair value (FV) of RM1.81 given its diversified income base and IOI Properties Group Bhd (IOIPG) with a FV of RM1.52 which is banking on its property development projects in China.
The research house has also maintained its buy recommendation on Sunway REIT Bhd with a FV of RM1.82, YTL Hospitality REIT with a FV of RM1.36, Mah Sing Group Bhd with a FV of 79 sen, UEM Sunrise Bhd (UEMS) with a FV of 48 sen and Crest Builder Holdings Bhd with a FV of RM1.76.
It noted that most developers are still assessing the economic situation, and deliberating whether to continue or defer future launches.
“We believe consumer sentiment shall remain weak for the time being with spending mainly focused on necessities while big-ticket items such as properties take a back seat.
“Nevertheless, developers under our coverage have a reasonable amount of unbilled sales, hence they shall remain profitable in FY20-21. To remain prudent, we are lowering our assumptions on their sales target, and cutting our earnings forecasts to reflect the impact from lower sales and the timing of revenue recognition,” said the research house.
However, it noted that it will be cautious about gearing. “We remain cautious about the financial leverage of companies as it is one of the key factors to their survival during an economic downturn.
“Based on our data, the net gearing of developers under our coverage is still under control with an average of about 36% while interest coverage remains strong at circa 8x. Eco World Development Group Bhd has the highest net gearing at 73.5% with manageable interest coverage of 3.2x followed by Crest Builder’s 66.3%.”
Nonetheless, AmInvest said the bulk of Crest Builder’s borrowings are used to finance its concession business where the payment receipts are guaranteed by the government. Excluding the concession borrowings, the company is in a net cash position.
According to the research house, most developers are trading at a P/BV of 0.2-0.4x, with the exception of Sunway (0.88x), whereby its property development business makes up 24% of the group’s total profit.
Based on historical numbers, Malaysian property developers traded in the range of 0.19-0.8x in 1998 and 0.17-0.85x in 2008 at their all-year low levels. At the current level of 0.2-0.4x, the stocks are trading at a discount to the 1998 and 2008 average low of around 0.5x.
“If the current economic condition persists, we believe property developers will still trade at their current P/BV levels. However, we will reduce our discount to revised net asset value (RNAV) when the economic conditions and new sales improve in the future,” it said.
Retail REIT managers are adopting a proactive stance in supporting their tenants through this difficult time.
“As the economy may take some time to regain its momentum, we believe the impact to the bottom line will be felt for at least several months. Hence, we are revising our FY20-21
earnings downwards by a further 5% by assuming a lower rental rate.
For YTL REIT, its properties in Malaysia and Japan are under master leases. Hence it will remain stable. “Nonetheless, we cut its FY20 and FY21 earnings by a further 5% each to reflect the lower contributions from its Australian properties due to the Covid-19 outbreak and its impact on the global economy.” — April 9, 2020
