APAC Realty - DBS Research 2018-05-10: Strong Project Pipeline

APAC Realty - DBS Vickers 2018-05-10: Strong Project Pipeline APAC REALTY LIMITED SGX: CLN

APAC Realty - Strong Project Pipeline

  • APAC Realty 1Q18 net profit rose 47%; more new launches in 2H18. 
  • Healthy project pipeline; active en-bloc sales provide positive backdrop. 
  • Trimmed earnings by 6% to 7% to account for lower margins. 
  • Maintain BUY with lower S$1.32 Target Price . 



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 6,100 registered agents as at April 2018. We believe that APAC Realty is poised to deliver robust 12% EPS CAGR during FY17-FY19F 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 5.0% based on 60% payout is attractive. 


Where we differ: Sizeable scale and leading market share a winning formula in our view.

  • ERA’s strong market share of c.38% in terms of transaction value in the Singapore residential market allows the agency to reach out to a diverse base of potential property buyers. 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. 


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

  • We maintained our projection of industry transaction value for the private residential market of S$52.2bn in FY18F (+15% y-o-y), and S$57.4bn for FY19F (+10%). 


Trimmed earnings to account for lower margins; revenue maintained.

  • We have adjusted FY18F and FY19F earnings lower by 6% to 7% after lowering gross margin to 12% for both FY18F and FY19F, from 12.5% and 12.6% previously. 
  • Given the upturn in buyer sentiment, partly driven by the strong collective sales, 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. 


Valuation: 


Reduced Target Price to S$1.32 on blended DCF and PE valuation methodology. 

  • Our Target Price of S$1.32 (previous S$1.42) is based on the average of discounted cash flow (DCF) valuation and PE valuation that is pegged to peers’ historical average of 15x FY18F earnings. 


Key Risks to Our View: 

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



WHAT’S NEW - 1Q18 Results highlight


1Q18 net profit up 47%; more new launches in 2H18:

  • APAC Realty's 1Q18 net profit was 46.8% higher y-o-y at S$5.9m on 56.7% surge in revenue to S$105.2m. 
  • APAC benefited from a recovery in the Singapore residential market. The private residential price index registered an increase of 3.9% in 1Q18, the steepest quarter-on-quarter gain since 2Q10. Revenue and net profit account for 23% and 18% of our FY18F estimates. We expect a stronger 2H18 as to date, only six out of 20 projects secured were launched.
  • In terms of ERA’s transaction value for 1Q18, 19.6% was from the private primary sale, 51.6% from the secondary market, 23.6% from HDB resale and the balance 5.2% from commercial resale and leasing. 
  • Overall market transaction volume for 1Q18 saw a 67.3% y-o-y rise for the private secondary market but the primary sales registered a 46.6% drop as few projects were launched in 1Q18.

Cost contained; negligible bad debts provision.

  • Total operating expenses saw a slight 6.2% increase despite the strong surge in revenue. Provision for doubtful debts was only S$0.5m (vs S$1.1m in 1Q17) despite the high trade receivables of S$70.9m as at 31 Mar 18.

Lower gross margins due to higher payout to agents and alignment with industry rate.

  • The lower gross margin of 12.2% for 1Q18, vs 15.1% in 1Q17 and 13.7% for FY17 was mainly due to higher payout to agents as they gradually move up the commission scale. 
  • To recap, agents generally get between 70% to 90% of the total commission received. ERA has also adjusted its commission structure to align with the industry standard.

Healthy project pipeline; active en-bloc sales provide positive backdrop.

  • ERA has already launched six projects and secured another 14 projects which will be launched during the rest of 2018, representing a total of close to 11,000 residential units available for sale. This is more than double the 4,800 units (from eight projects) launched by ERA in 2017, which points to higher growth potential for ERA. The bulk of the projects is expected to be launched in 2H18.
  • En-bloc sales have been very active over the past one to two years. The redevelopment of these en-bloc sites will add a significant number of housing units to the existing supply pipeline. The potential units from the redevelopment of en- bloc sites (13,200) and available parcels on Government land sales (6,900) could add up to 20,100.


Earnings and Recommendation


Slight adjustment to earnings to account for lower margins; revenue maintained.

  • We have adjusted FY18F and FY19F earnings lower by 6% to 7% after lowering gross margin to 12% for both FY18F and FY19F, from 12.5% and 12.6% previously. The lower margin assumption is to account for the higher payout to agents and to align with the industry standard. 
  • We maintained our revenue forecasts and our assumption of 15% growth in transaction value for the primary and secondary private residential market and 10% growth for the HDB resale market for FY18F. 
  • Growth estimate for FY19F is also maintained at 10% for the private segment and 5% for HDB resale.
  • Maintain BUY as we expect more new launches in 2H18. Target Price lowered to S$1.32 (prev S$1.42), still based on blended DCF and PE valuation that is pegged to the peers’ historical average of 15x FY18F earnings.





Lee Keng LING DBS Vickers | Derek TAN DBS Vickers | https://www.dbsvickers.com/ 2018-05-10
SGX Stock Analyst Report BUY Maintain BUY 1.32 Down 1.420



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