Property sector remains highly challenging

KUALA LUMPUR: Kenanga Research is opting for property firms with strong cash flow to underpin good dividends as it maintained that the operating environment remains highly challenging.

"The outlook for the sector will continue to be clouded by oversupply and labour shortages, while housing affordability is eroding on the back of rising interest rates and soaring construction cost.

"On one hand, share prices of property companies could have found the bottoms (as most of them only trade at a fraction of their RNAV). On the other hand, there is no re-rating catalyst in sight," it said while reiterating its "neutral" call on the sector.

For the sector, the research firm has "outperform" recommendations on Eco World Development Group with a target price of 83 sen and IOI Properties Group with a target price of RM1.60.

According to Kenanga, there was a slight sequential deterioration in the recently concluded second quarter results season although it said this was unsurprising.

"IOIPG was the only company that beat our forecast thanks largely to stronger-than-expected overseas operations (Singapore and China), while MRCB was the only company that missed our forecast as its property unit struggled to cover overheads on low sales," it said in a note.

It added that certain developers reported healthy profitability but could face margin pressures moving forwards as the sharp rise in construction costs could exceed their contingency budgets.

However, it said most companies met expectations in terms of 1H22 sales as home buyers physically visit sales galleries following the economic reopening.

Year-to-date, Kenanga said most developers are still trailing their full-year targets for new launches due to the high construction costs as well as labour shortages and high interest rate environment eroding affordability.

"We take comfort that the cost of certain inputs, such as steel, has been easing over the last couple of months," it added.