KUALA LUMPUR – It is still rough seas ahead for property developers even with the abolishment of the Goods and Services Tax (GST).
Kenanga Investment Bank Bhd said the sales outlook for the property sector remains unexciting, following weak first quarter ended 31 March 2018 results.
“It was a weak 1Q8 reporting season for developers as margin issues plagued earnings, resulting in the fourth consecutive quarter of downward earnings revisions.
We also saw more misses in terms of headline sales, although we note that the big-boys were mainly on track largely due to their bigger marketing presence and wider market reach,” said the research house.
“Sales outlook remains unexciting on looming margin risks with our universe’s total sales/earnings expected trajectory of decreasing some nine per cent. In fact, it will be harder to predict sales momentum this year as most developers are actively clearing inventories,” it added.
Kenanga IB noted that the sentiments going forward was unlikely to improve.
The sentiment on the sector was likely to be subdued because of the absence of catalysts, oversupply and affordability issues, while policy clarity will likely be made known during Budget-2019 announcement, it added.
“However, we think that bashed-down big boys with deep value, firmer earnings trajectories in the nearer term and decent balance sheet, are tactical options and under this investment case,” it said.
The zero rating of GST, contrary to popular beliefs, will not be a game changer within this segment.
“The reduction of GST to zero will help offer some relief for developers’ margins and/or allow them to pass on savings to buyers to improve affordability. However, since most developers’ product pipelines are largely residential and GST savings will only be felt in the newer launches, impact on margins may not be immediately significant,” it said.
“As a result, we do not think this will be seen as a major catalyst for the sector. Additionally, we note that developers are giving discounts/rebates/freebies and are extensively using agents to clear inventories, which will also have negative implications on margins; nonetheless, we reckon that it is better for developers to clear inventories to unlock capital rather than retaining margins at this juncture.”
Out of 13 developers under Kenanga IB’s coverage, 46 per cent missed expectations while only one stock, Hua Yang Bhd, exceeded expectations with the rest were “within to broadly within expectations”.
”This performance is worst worse than last quarter whereby 31 per cent of coverage disappointed while 31 per cent positively surprised,” the firm said.
As such, two stocks that the investment house is keen on are UEM Sunrise Bhd and Malaysian Resources Corp Bhd.