APAC Realty - DBS Research 2018-02-26: Riding On Property Sector Uptrend

APAC REALTY LIMITED CLN.SI

APAC Realty - Riding On Property Sector Uptrend

Impressive FY17 results, net profit surged 63% y-o-y; above expectations; DPS of 2cts declared.
ERA outperformed residential property market.
Robust project pipeline; projects secured to date is double that in the whole of 2017.
Raised earnings by 12% for FY18F and 8% for FY19F; maintain BUY with higher $1.25 Target Price.

ERA Realty, a wholly-owned subsidiary of APAC Realty, is one of Singapore’s largest real estate agencies with approximately 5,882 registered agents, as at January 2018.
We believe that APAC Realty remains poised to deliver a robust 10% 2-year CAGR in EPS on the back of a turn in the Singapore residential market, which is at the cusp of a multi-year recovery.
The projected FY18F dividend yield of 4.5% based on 60% payout is attractive.

Having a strong track record and a sizeable agent base is a key winning formula for ERA as it allows the agency to reach out to a diverse base of potential property buyers.
In 2017, ERA’s market share grew to c.38% in terms of transaction value in the Singapore residential market, up from approximately 32% in 2015 and 29% in 2014.
ERA has a pipeline of more than c.11,000 units across 20 new project launches till 3Q18, which is significantly higher than the units secured in the whole of 2017. Successful sell-through rates for the various projects will set the stage for another record year in FY18F.

We revised our industry transaction value upwards to S$50bn, representing 10% y-o-y growth for FY18F, vs our previous assumption of 5% growth, while keeping our FY19 growth projection at 5%. Coupled with the assumption of a slight improvement in margins, we are expecting earnings growth of 14% for FY18F and 7% for FY19F.
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 value adds 2% to our EPS and Target Price estimates.

Our Target Price of S$1.25 is based on the average of discounted cash flow (DCF) valuation (assuming 8.5% weighted average cost of capital, 0% terminal growth), and PE valuation that is pegged to peers’ historical average of 15x FY18F earnings.

The strong improvement in net profit was achieved on the back of a 39.2% y-o-y increase in revenue for FY17. The increase in revenue is largely due to the improvement in brokerage income. APAC benefited from a recovery in the Singapore residential market where there was a substantial increase in transaction volume in the private primary and secondary market. The private residential price index also registered its first increase of 1.1% for the whole of 2017, after 3 years of declines.
A final dividend of 2 cents per share was declared for FY17. This works out to c. 90% of 4Q17 net profit. APAC has guided that it is committed to pay at least 50% of FY18F profit as dividend. Assuming a payout ratio of 60% for FY18F, dividend yield is attractive at 4.5%.

The overall property transaction value for the whole market hit S$45.4 bn (+53% y-o-y) in FY17 and ERA outperformed the industry with a 63% jump in net profit in FY17.
In terms of market share, ERA accounts for 37.9% of the total market transaction value, slightly higher than the 37.5% market share in FY16. The market share for ERA in terms of number of agents remains the same at 21% with 5,882 agents as at January 2018.

To date, ERA has already secured more than 20 projects to be launched in 2018 with about 11,000 residential units available for sale.
This is double the 4,800 units (from 8 projects) launched by ERA in 2017.

Our initial estimates were conservative as transaction value continues to power on. FY17 data were 13% higher than our forecast. We revised our industry transaction value upwards to S$50bn, representing 10% y-o-y growth for FY18F, vs our previous assumption of 5% growth, while keeping our FY19 growth estimate at 5%.
Coupled with the assumption of a slight improvement in margins, we raised FY18F net profit by 12% and 8% for FY19F.
Maintain BUY with a higher Target Price of S$1.25 (prev S$1.12), based on blended DCF and PE valuation that is pegged to the peers’ historical average of 15x FY18F earnings.

Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2018-02-26

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.25 Up 1.120