Developers need to review portfolio, targets in view of market conditions
THE slowdown in the property market has seen many developers force-tweaking their business strategies this year - from reviewing their product portfolio to revising annual targets.
According to CIMB Research, it will be the developers focusing on mass-market projects that will be better prepared to withstand the slowdown, going into 2017.
“We believe that mass-market housing will continue to be the focus of most developers in 2017. Those that have lined up major launches of mass-market housing projects for next year, in our view, offer the highest chance of sustaining, if not beating, their 2016 sales in 2017.”
CIMB Research points out that most developers within its coverage are expected to deliver strong quarter-on-quarter sales growth in the third quarter of 2016, driven by new launches for the mass-market buyers.
“However, the recent turn of events, ranging from uncertainties about the US economic policies and volatile exchange rate movements, would have a negative impact on sentiment.”
Looking at the results of some of the listed developers from the recently concluded reporting season, earnings have been steadily growing and are within expectations, despite the current challenges.
Due to the challenging market conditions, Mah Sing Group Bhd revised its 2016 full year sales target from RM2.3bil to RM1.8bil.
Kenanga Research says the company is “biting the bullet” by being prudent with the revision.
“They have also embarked on their ‘Luxury Made Affordable’ products for first-time buyers and the ‘Lock and Roll’ campaign for upgraders. The Lock and Roll campaign is an innovative deferred financing plan where buyers can ‘lock’ a completed unit with RM10,000 booking fee and ‘roll’ their cash for 24 months.”
The company recorded a 8.9% jump in net profit to RM91.89mil for the third quarter ended Sept 30, 2016 from RM84.40mil in the same quarter a year ago.
This was achieved on the back of a lower revenue of almost 5% at RM732.37mil from RM770.74mil, a year ago. Earnings per share (EPS) increased to 3.05 sen from 2.74 sen.
With cash and bank balances amounting to about RM727.9mil and net gearing ratio of 0.09 times, the group says it achieved higher operating profit for property development in the nine months ended Sept 30, 2016.
For the cumulative nine months, Mah Sing’s net profit was RM275.75mil from RM273.79mil in the corresponding period a year ago, on the back of a lower revenue of RM2.22bil from RM2.33bil. Earnings per share was 9.92 sen from 11.02 sen.
Kenanga Research says while earnings were within expectations, sales were behind targets.
“This is largely due to challenges in converting its initial high bookings to sales and purchase agreement sales as securing end-financing continued to be challenging.”
Kenanga Research has maintained a “market perform” call on the stock, while CIMB Research has downgraded the stock to “hold.”
“We downgrade the stock to “hold” as the weak sales outlook in the near term could cap its share price upside,” says CIMB Research.
Sime Darby Property Bhd, the company’s property division, also aims to see sales for its current financial year ending June 30, 2017 boosted by launches of more mass-market products.
Earlier this week, managing director Datuk Jauhari Hamidi said the bulk of the 3,000 launches it plans this year would comprise affordable homes.
“The theme for this year is affordability. A lot of the affordable homes will be launched this financial year and it is in line with our obligation to the Selangor government.
“The house will range between RM200,000 and RM600,000, depending on category, size and location, he said.
According to Public Investment Bank Research, the group is expected to benefit from the high speed railway project as it is believed that two stops, namely, Labu and Muar, would be located at its existing plantation estates.
“It will help unlock the asset value of its plantation land, which can be turned into property play. The railway project, connecting between Malaysia and Singapore, will call for open tender by the fourth quarter of 2017.”
Sime’s property division reported a profit before interest and tax of RM172mil in its first quarter ended Sept 30, 2016, compared with RM102mil in the previous corresponding period.
The increase was mainly due to a gain on disposal of a 100% equity interest in Sime Darby Property (Alexandra) Ltd in Singapore amounting to RM131mil to Aster Investment Holding Pte Ltd.
In the first quarter of its current financial year, the division achieved an overall gross sales value of RM436mil against RM150mil in the previous corresponding period, representing a year-or-year increase of 191%.
On the international front, the company says completed units of Phase 1 of the Battersea Power Station regeneration project will be handed over to buyers in stages over a six month period, beginning this month.
The slow property market outlook will also see IJM Corp Bhd focusing more on affordable properties, says Kenanga Research.
“While IJM had become more selective in jobs, we are still expecting IJM to bag high-profile jobs like the LRT3 and highway jobs. On the property front, it is looking to launch more affordably priced project ranging from RM350,000 to RM750,000.”
The research house adds that IJM’s outstanding order book and unbilled sales currently stand at around RM8.2bil and RM1.7bil respectively, providing earnings visibility at least for the next three to four years.
IJM Corp’s net profit grew marginally in the second quarter ended Sept 30, 2016, despite a sharp jump in revenue, as gains from its construction and plantation units were offset by slower growth in the property segment.
Earnings stood at RM163.89mil, compared with RM156.38mil made a year ago, while operating revenue rose 11% to RM1.48bil from RM1.33bil. Revenue of the property division, however, saw a marginal decline of 5.3% to RM269.5mil from RM284.5mil last year due to slower take up rate.
In the first half ended Sept 30, 2016, its earnings fell 43.3% to RM279.4mil from RM493.25mil, while revenue increased 11% to RM2.80bil from RM2.52bil.
Kenanga says the company’s results during the period was within expectations.
“Property sales of RM700mil are on track to meet our and managements target of RM1.4bil.
“We continue to reiterate our market perform call on IJM Corp with an unchanged sum of parts-driven target price of RM3.51, as we believe that the weakness in the property market and infrastructure division will be offset by potential positive news flow from the construction sector.”
Hong Leong Investment Bank Research, however, believes that the company’s division remains weak.
“Despite flattish revenue, first half property pre-tax profit fell 27% (after removing foreign exchange impact) due to weaker margins from product shift to more affordable housing and higher incentives to buyers.
“First half sales stood at RM700mil and management is targeting to match 2016’s RM1.4bil for the full year. Unbilled sales of RM1.7bil implies 1.4 times cover on 2016’s property revenue.”
Analysts believe that Sunway Bhd is on track to achieve its revised sales target of RM1.1bil, underpinned by steady property sales to date and better performance of its other divisions.
Given the challenges in its property development segment, RHB Research Institute says the company can rely on its property investment and construction divisions to support its earnings.
“After using some capital expenditure, the theme parks and hotel have seen positive results.
“We make no changes to our earnings forecast. Unbilled sales declined slightly to RM1.8bil from RM2bil as at the second quarter ended June 30, 2016. Meanwhile, its construction order book was relatively unchanged at RM4.8bil, of which 27% comprised internal jobs.”
On property, Affin Hwang Capital Research says Sunway Mont Kiara, Iskandar and Gandaria are the main projects contributing to the company’s sales.
“Sunway has planned more aggressive launches worth RM2bil for 2017 compared with RM800mil in 2016. Unbilled sales was at RM1.8bil. Sunway Construction also secured RM2.6bil worth of new contracts to lift its order book to RM4.8bil. This will support earnings growth in 2017.”
MIDF Research, in its report, noted that the RM2bil worth of projects the company plans to launch next year are located within the Klang Valley, Penang, Johor, and China.
Sunway recorded an 8% increase in its third-quarter earnings ended Sept 30, 2016 to RM143.6mil from a year earlier due to better performance from four of its five main business segments, the exception being quarry.
The group, which achieved the better bottom line on a 20% higher revenue of RM1.14bil, reported that pre-tax profit of the property development business grew 62% to RM62.2mil in the third quarter due to higher progress billings from local projects and other property projects in Singapore.
For the nine-month period ended, Sunway’s earnings fell 23% to RM400.07mil on a 10.1% jump in revenue to RM3.36bil.
The company attributed the reduced profit to lower fair value gains recorded by Sunway Real Estate Investment Trust which was about RM87.1mil lower compared with the previous period.
Sunway held back the launch of two projects this year, due mainly to the slowdown in the current property market.
According to reports, Sunway registered new sales of RM192mil in the third quarter of this year, bringing the total new sales to RM805mil for the nine months of 2016, accounting for 73% of the new sales target of RM1.1bil (from RM1.4bil initially).
In the fourth quarter, it plans to launch RM245mil more worth of properties, including retail and offices in Sunway Iskandar and Tianjin Eco-City condominium.
Malaysian Resources Corp Bhd (MRCB), in its notes accompanying its third quarter earnings ended Sept 30, 2016, says its property development division will continue to focus on launching products suited to current market needs and expectations.
“Registrations for the soon to be launched Sentral Suites project in KL Sentral has been very encouraging. This provides a strong foundation for sales growth in 2017.
“Besides this, the division will continue to deliver high quality commercial buildings for long-term tenants that will allow for either further asset injections into MRCB Quill REIT, or sales to other potential investors.”
MRCB’s net profit surged more than four times to RM29.39mil compared with RM5.64mil during its third quarter. Revenue was also up by 47% to RM551.22mil compared with RM374.06mil in the previous corresponding quarter), mainly due to group’s core operating activities of property development and investment.
Cumulative net profit for the nine months period ended Sept 30, 2016 however fell to RM79.28mil from RM303.60mil in the previous corresponding period, due to a RM278.5mil gain from disposals of group’s non-core assets last year.
Revenue increased to RM1.38bil from RM1.31bil a year earlier.
According to reports, the company expects to launch five new projects despite the slowdown in the property market.
CIMB Research is maintaining its “add” call for MRCB as the company’s medium-term catalysts remain deal-driven, on top of likely domestic contract wins.
The research house says the potential new developments to explore opportunities for a transport oriented development (TOD) in Bandar Malaysia’s phase 1 could be positive for the stock.
“Property division was the best performer in nine months of 2016, with 29% growth in revenue, outpacing other divisions, including construction.
“The bright spot for construction was the sequential earnings before interest and tax margin improvement since the first quarter of 2016 to 4.8% in the third quarter of 2016, although fourth quarter earnings could be capped by the timing of new jobs.”
RHB Research Institute, meanwhile, says MRCB’s earnings improvement and financial position should be more visible next year.
“This is underpinned by the potential disposal of the Eastern Dispersal Link as well as other commercial office buildings.
“Earnings from key operations are driven by its RM1.3bil unbilled sales and RM2.13bil construction orderbook.”
IOI Properties Group Bhd, in its notes accompanying its first quarter results ended Sept 30, 2016, says the demand for properties in the medium price range category remains resilient.
Affin Hwang Capital in a report, says it is maintaining its long-term “buy” call on the company with a 12-month target price of RM2.89.
IOI Properties saw its net profit grow by 64.2% to RM189.57mil in the first financial quarter ended Sept 30, 2016 from RM115.48mil a year ago.
The stronger earnings performance was mainly attributed to better revenue and operating profits from its property development and property investment segments, as well as higher revenue recorded by its leisure and hospitality segment.
Affin Hwang says earnings was within expectations.
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“We believe IOI Properties also benefited from the translation of earnings from its Singapore operations due to the weaker ringgit. Despite the lower earnings before interest, tax, depreciation and amortisation margin of 30.1%, net profit increased 64% year-on-year on the back of the higher revenue and lower effective tax rate.
“IOI Properties’ domestic property development sales were from its IOI Resort City and Warisan Puteri@Sepang projects. IOI City Mall saw occupancy rates improve to 94% in the first quarter of its current financial year from 88% in the previous corresponding period and upward rental rate revision.”
Analysts are however concerned about the company’s recent land acquisition in Singapore.
Kenanga Research says the venture had increased the odds of IOI Properties going for another round of cash-calls. The deal had increased IOI Properties’ gearing to beyond the research house’s comfort level of 0.65 times.
“We expect 2017 net gearing to rise to 0.65 times from 0.23 times which is above our comfort levels of 0.5 times to 0.6 times this increases the odds of cash-calls.”
Last month, IOI Properties acquired 2.69 acres of leasehold land at Central Boulevard in the Marina Bay area for a tender consideration of S$2.57bil (RM7.77bil).
