APAC Realty - DBS Research 2017-11-13: All Guns Blazing

SGinvestors.io

APAC REALTY LIMITED CLN.SI

APAC Realty - All Guns Blazing

• APAC Realty's 3Q17 net profit ahead of our estimates as property industry volumes continue to power on.
• Strong pipeline of ten projects to be marketed through the ERA network in 2018F.
• Raising earnings by 9-14%; TP revised to S$1.12.

Purest proxy to Singapore residential volumes. 

• ERA Realty, a wholly-owned subsidiary of APAC Realty, is one of Singapore’s largest real estate agencies with approximately 6,176 registered agents, as at 10 July 2017. 
• We believe that APAC Realty remains poised to deliver a robust 10% 2-year CAGR in EPS on the back of a turn in Singapore residential market.

Where we differ: 

Only broker covering the stock; sizeable scale and leading market share a winning formula in our view.

• Having a sizeable agent base is important for ERA to perform well as it enables the agency to have a strong and wider reach to a diverse base of potential property buyers, renters and allows the group to capture the lion’s share of market transactions in Singapore. 
• In 2016, ERA’s market share was approximately 38% in terms of transaction value in the Singapore residential market, up from approximately 32% in 2015 and 29% in 2014.

Stronger-than-projected volumes could surprise on the upside.

• Our initial estimates were conservative as transaction value continues to power on. We revise our industry transaction value upwards to S$40bn (40% y-o-y) while keeping our FY18/19 estimates at a further 5% growth. 
• Given the upturn in buyer sentiment driving demand for homes, we believe that the opportunity to surprise on the upside is high. Every S$1bn in transaction adds 2% to EPS estimates and TP.

Valuation

• Blended DCF and PE valuation methodology. Our TP of S$1.12 is pegged to peers’ historical average of 15x FY18F earnings.

Key Risks to Our View

• It is dependent on Singapore’s residential property market and macroeconomic conditions.

WHAT’S NEW

All guns blazing; 64.6% y-o-y jump in 9-month net profit to S$18m; above expectations. 

• APAC Realty reported a 64.6% y-o-y jump in net profit to S$18.0m for 9-month 2017, on the back of a 30.3% increase in revenue to S$270.9m. The 9-month net profit accounts for 85% of our FY17F numbers, above expectations. Excluding IPO expenses of S$1.1m (total IPO expenses amounted to S$1.9m, of which S$0.9m was capitalised against share capital), net profit would have been S$19.1m (+74.3% yo-y).
• For 3Q17, net profit surged 7.2% y-o-y to S$5.5m on 30.3% gain in revenue to S$105.5m. The increase in revenue is largely attributable to the increase in brokerage income from resale and rental of properties, and new home sales. 
• APAC Realty benefitted from a recovery in the Singapore residential market where there is a substantial increase in transaction volume for the private primary and secondary market.

Margins in line. 

• Net margins for the 9-month period was 6.7%, roughly in line with our expectation of 6.2% for FY17F. 3Q17 net margin was 5.2% (impacted by IPO expense).

Project pipeline. 

• To date, ERA has already secured more than ten projects to be launched in 2018 with close to 10,000 residential units available for sale. This is double the 4,800 units (from eight projects) launched by ERA in the first nine months of 2017.

Outlook 

• Singapore’s property market recovery is expected to be gradual in the next 12 months with more transactions across all segments of the real estate market. The 3Q17 private residential price index also registered its first increase after 15 consecutive quarters of decline. APAC is expecting property transaction to reach 21,000-23,000 (excluding EC transactions) units for 2017 or an approximate 28% increase over 2016’s 16,378 units.
• Prices are expected to increase by up to 1% for 2017, a reversal of the 3.1% decline in 2016. A recovery in the private rental market may happen in the next 12 months in the form of lower vacancy rates, as the expected number of completed units in 2018 is only half, or approximately 8,000 of the 16,000 expected completions in 2017. APAC is expecting an overall 2-3% decrease in rental prices for 2017.
• HDB resale prices are expected to remain more or less stable, with transactions for the whole year projected to be in the range of 21,000-22,000 units. For HDB rental, APAC expects rental transactions for 2017 to range from 41,000-43,000; a decline from the 44,530 units that were rented out in 2016, as some of the demand is shifted to the private property market.

Declining stockpile but vacancy rate still high. 

• The total number of unsold private residential units has been declining for the past two years and reached 17,178 (including ECs) as at 30 September 2017. However, the vacancy rate of completed private residential units remained high at 8.4% as at 30 September 2017.
• More supply from en-bloc sites. As en-bloc sales have been very active over the past 1-2 years, the redevelopment of these enbloc sites will add a significant number of housing units to the existing supply pipeline. The potential units from redevelopments of en-bloc sales (9,300) and available parcels on government land sales (7,400) could add up to 16,700.
• According to URA, a large part of this potential supply could be put up for sale in the next 1-2 years.

Revised Estimates.

BUY with TP of S$1.12 based on 15x FY18F PE. 

• YTD industry transaction value is estimated to be close to S$38bn (as of October 2017); ahead of our initial estimates of S$36bn for the full year. As such, we raise our industry transaction estimates to S$40bn; implying a c.40% growth y-o-y. 
• We maintain our 5% y-o-y growth for FY19F. As such, our estimates are raised by 7- 14%. TP is raised to S$1.12, based on 15x PE multiple on FY18F earnings.

Derek TAN DBS Vickers | Lee Keng LING DBS Vickers | Singapore Research DBS Vickers | http://www.dbsvickers.com/ 2017-11-13

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.12 Up 1.030