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Property sector to still be bogged down by rising cost, supply chain disruption

Overall sector profits declined by 25.1 per cent quarter-on-quarter (QoQ) and were flattish at 1.8 per cent year-on-year (YoY).

KUALA LUMPUR: Labour shortage, supply chain disruption and rising building material cost will continue to pose downside risks to the property sector, said Hong Leong Investment Bank Bhd (HLIB)

HLIB also said Malaysian listed property companies' results in the recently-concluded reporting season for the first  quarter (Q1) of 2022 were a mixed bag.

Two out of eight property stocks the firm covers are above its estimates, three were in line while the remaining three come in below estimates.

Overall sector profits declined by 25.1 per cent quarter-on-quarter (QoQ) and were flattish at 1.8 per cent year-on-year (YoY).

"One of the key issues that surfaced during 1Q22 was the issue of labour shortage. Five companies (SP Setia, Sime Darby Property Bhd, Matrix Concepts Holdings Bhd, UEM Sunrise Bhd and Lagenda Properties Bhd) highlighted the labour shortage issue as a key challenge faced by them.

"Due to labour shortage, construction activities during the quarter were constrained resulting in lower progress billings.

"This issue had also likely caught investors off guard as four out of these five companies' earnings came in below consensus' estimates. While the labour shortage issue has been plaguing the construction segment since last year, it has only become apparent in 1Q22," HLIB said in a report today.

The end of the Home Ownership Campaign also played a role in the decline on both QoQ and YoY sales for SP Setia Bhd and UEM Sunrise Bhd whereby the campaign supported sales in previous year as most of their properties were in the mid to high price range.

Despite the earlier than expected interest rate hike cycle, HLIB said the the overall macro environment in Malaysia remained supportive for the property sector.

This was on the back of economic recovery and relatively well contained inflation compared to other regions, due to government subsidies on retail oil prices.

"Nonetheless, key headwinds such as labour shortage in the construction sector, rising building material cost and supply chain disruption will continue to pose downside risks to the sector.

"One of the key downside risks to look out for in upcoming quarters is the compressed margin as the effect of rising construction costs start to kick in.

"While most developers have generally downplayed the rising construction costs impact with guidance ranging from no impact to moderate impact on margin, we believe that developers, particularly those that have a lower pricing power will be impacted in coming quarters, especially during project completion stage when costs are finalised," it added.

HLIB maintained its "Neutral" call on the sector and continued to advocate investing in selective names that would fare relatively better under the current macro environment.

Its top picks are Sunway for its well-integrated property, construction and building material business model.

The research firm said Sunway is also one of the prime beneficiaries from economic recovery and borders reopening.

It also favours Mah Sing Group Bhd for its exposure in the affordable segment and its asset-light business and quick turnaround business model.

"Finally, we also like Matrix for its generous dividend payout ratio of more than 50 per cent, translating to an attractive dividend yield of 6.3 to 6.7 per cent for financial year 2023 (FY23)-FY24, being one of the highest in the sector," it said.


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