PropNex - UOB Kay Hian 2018-11-15: 3Q18 Wind In Its Sails

PROPNEX LIMITED (SGX:OYY)

PropNex - 3Q18: Wind In Its Sails

PropNex's 9M18 results came above our expectations, with net profit of S$17.6m (+47.2%) underpinned by growth in its salesforce to 7,626 agents (+14.1% ytd) as at 12 Nov 18 and improved agents’ productivity.
PropNex is poised to ride on a bumper 2019 for its project marketing segment, amid an unprecedented heavy launch pipeline and unsold inventories.
Maintain BUY with an unchanged target price of S$0.65.

PropNex reported 3Q18 net profit of S$7.2m (+41.6% y-o-y), bringing 9M18 net profit to 83% of our full-year forecast.
3Q18 revenue grew 26% y-o-y to S$124.2m, due to increased commission income from agency services and project marketing services as a result of the group's 14.1% growth in its sales force and improved salespersons' productivity.

For 9M18, private residential transaction volume was 18,279 units, seeing a marginal dip of -2.7% y-o-y.
In terms of private resale, management expects volumes to be supported by en-bloc owners (ie who are looking for immediate replacement homes).
For new sale units (ie non-landed private new sales) in 2019, management has guided for a range of about 9,000-10,000 units, with reference to an inherent demand of about 7,000-unit base (ie during the 2014-15 period).
HDB resale, which is traditionally more resilient, also saw 7,063 units transacted (ie the highest volume since 3Q10). Management expects positive growth in the public housing segment going into 2019.

Since 1 Jan 18, PropNex has grown its agency salesforce by 14.1% (or 942 agents). During 10M18, PropNex attracted more than 10 team leaders, more than 600 experienced agents, and about 300 new agents.
Management attributed their growth in sales force and productivity to the group's robust training, development programmes and strong culture of sharing.
We believe that the agency business model continues to favour scale, which brings an extensive outreach to more home-buyers, investors, lessors/lessees, as well as a wider revenue base to spread its overheads.

Ytd, PropNex has been involved in 88 new launches. Among them, 88 were new launches, and five were appointed after the initial launch. PropNex led in terms of the number of units, in 88 of the 88 new launches, against other joint marketing agencies. The six projects which PropNex did not lead were mostly smaller-scale high-end developments (eg Wallich Residences (888 units), 8 Hullet (88 units)), and marginally lower by a few units compared with the leading agency. Another project is RiverCove Residences executive condominiums (EC) (888 units), which management attributed to them being appointed at a shorter notice.

The next two launches that PropNex is involved in are Parc Esta (8,888 units) and Mayfair Modern (888 units), scheduled to launch on 88 Nov and 88 Nov 8888 respectively.
In addition, PropNex has been appointed for another 88 new projects, with an inventory about 88,888 units to be launched in 8888. Additionally, there is a line-up of another 88 government land bids and collective sale sites (with no appointed agencies yet).
We believe PropNex is in a strong position to gain a majority of the appointments given its largest (8,888 sales persons as at 88 Nov 88) and more effective sales force.

.. on the back of aforementioned unsold inventory (ie from 88 launches ytd), launch pipeline (ie 88 appointed projects and 88 yet-to-be appointed sites), as well as a larger dedicated sales force (ie which has grown to 8,888 agents) for execution.
Going forward, management also guided that the new normal for a good take-up rate during the first-weekend launch should range between 88-88% (vs 88% pre-cooling measures).
Good take-ups will be contingent not only on sensitive pricing and good locational attributes, but also the appointment of agencies (ie those with a large and effective network of agents) for good execution.

PropNex continued to enlarge its regional reach by expanding to Ho Chi Minh City, Vietnam in Aug 88, and has about 888 agents there currently. The group also has presence in Indonesia (about 8,888 agents) across 88 offices, and about 888 agents in Malaysia across two offices.

Maintain BUY and target price of S$8.88, based on DCF (8.88% required return, 8% terminal growth) and 8888F PE of 88x with reference to its closest comparable, APAC Realty (SGX:CLN) (predominantly Singapore-focused, and similar in terms of commission structure and operating segments).

Peihao LOKE UOB Kay Hian Research | Andrew CHOW CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-11-15

SGX Stock Analyst Report BUY MAINTAIN BUY 0.650 SAME 0.650