Property Developers - It’s All Relative
Maintain NEUTRAL.
It was a weak 1QCY18 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. Sales outlook remains unexciting on looming margin risks with our universe’s total sales/earnings expected trajectory of -9%/-9% YoY in FY18E/FY19E and +3%/+11% YoY in FY19E/FY20E.
In fact, it will be harder to predict sales momentum this year as most developers are actively clearing inventories.
The sentiment on the sector is 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.
More
misses with headline sales with 38% of our coverage were behind in
terms of meeting targets (IOIPG, MRCB, SUNSURIA, AMVERTON, MAGNA) while
the rest were in-line to broadly in-line.
Unexciting sales outlook coupled with earnings risks due to margin compressions. Our universe’s total sales/earnings expected trajectory is -9%/-9% YoY in FY18E/FY19E and +3%/+11% YoY in FY19E/FY20E. Our universe’s; (i) average unbilled sales are at 1.1 years or at slight improvement from last quarter (0.9 years), (ii) average net gearing is at 0.23x or a healthy level. 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.
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.
It was a weak 1QCY18 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. Sales outlook remains unexciting on looming margin risks with our universe’s total sales/earnings expected trajectory of -9%/-9% YoY in FY18E/FY19E and +3%/+11% YoY in FY19E/FY20E.
In fact, it will be harder to predict sales momentum this year as most developers are actively clearing inventories.
The sentiment on the sector is 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.
Unexciting sales outlook coupled with earnings risks due to margin compressions. Our universe’s total sales/earnings expected trajectory is -9%/-9% YoY in FY18E/FY19E and +3%/+11% YoY in FY19E/FY20E. Our universe’s; (i) average unbilled sales are at 1.1 years or at slight improvement from last quarter (0.9 years), (ii) average net gearing is at 0.23x or a healthy level. 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.
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.
Source: Kenanga Research - 5 Jun 2018
No comments:
Post a Comment