APAC Realty - RHB Invest 2018-05-10: A Better Bet On Singapore Property

APAC Realty - RHB Invest 2018-05-11: A Better Bet On Singapore Property APAC REALTY LIMITED SGX: CLN

APAC Realty - A Better Bet On Singapore Property

  • Maintain BUY and Target Price of SGD1.35, offering a 31% upside.
  • APAC Realty’s 1Q18 results were in line, after adjusting for seasonality factors. The stock’s valuation remains reasonable at 2018F P/E of 12x (vs peers’ 15x). ERA secured agent roles for 19 new launches (c.10,348 units) in 2Q/3Q, which should provide a healthy boost to its 2H income.
  • Overall, residential demand is expected to remain buoyant, driven by replacement demand from en-bloc sellers, and ample liquidity from sales proceeds.
  • APAC Realty offers a dividend yield of 5%, and has room for inorganic growth given its strong net cash position.

Expecting a stronger 2H.

  • ERA – the real estate services brand of APAC Realty (APAC) – has so far secured a total of 21 launches for 2018, of which 19 are expected to be launched in 2Q/3Q. 
  • While its 2Q earnings are expected to be softer due to lower transactions in 4Q17/1Q18, we expect strong 2H transaction volumes driven by the launch of en-bloc projects. Based on our estimates, 53 projects were sold via en-bloc since 2017, which alone could potentially add > 20,000 units to the launch pipeline. 
  • The higher expected prices for new launches are also likely to drive resale volumes as more investors hunt for bargain purchases.

Market share remains stable.

  • ERA’s market share in the primary residential market stood at 37.9% for 1Q18 (2017: 39.4%), with 58.8% share in the HDB resale market (2017: 48.1%) and 35.8% share in the private resale market (2017: 38.8%). 
  • Overall market share for 1Q18 was 36.3% (2017: 37.9%).

Possible reasons for recent share price weakness.

  • While the residential outlook in Singapore (SG) has been improving, APAC Realty’s share price has underperformed the broader market over the last month. Several reasons could have triggered this, leading to some profit taking by investors. These include the potential listing of another leading SG real estate agency (by 3Q18), and concerns over additional cooling measures being implemented. 
  • Fundamentally, we believe APAC Realty is in a strong position to tap the ongoing boom in residential sales and we see the recent weakness as a buying opportunity.

Net cash position, with 2018F dividend yield of 5%

  • Net cash position, with 2018F dividend yield of 5% based on 60% payout ratio (management’s guidance of at least a 50% payout). 
  • APAC Realty has a net cash position of SGD64m (as of 1Q18). Management has plans to deploy the cash and grow the business via potential acquisitions at its Indonesian franchise, the acquisition of an office building in SG to consolidate its business and save on rental costs, and the acquisition of a real estate support services business, which could add stability to its non-recurring income stream.

Still our top mid-cap pick, with DCF-derived Target Price of SGD1.35 (WACC: 8%, TG: 0%).

  • The valuation remains attractive, with APAC trading at 2018F P/E of 12x, at > 10% discount to comparable global peers. 
  • Upside could come from potential acquisitions or expansion of its business, which we have yet to factor in.
  • Key risks include stiff competition, disruption from technology players, ability to retain key personnel, and concentration risk (earnings) on the local market.

Shekhar Jaiswal RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-11
SGX Stock Analyst Report BUY Maintain BUY 1.350 Same 1.350