APAC Realty - RHB Invest 2019-02-12: Deepening Overseas Presence


APAC Realty - Deepening Overseas Presence

Regional expansion into Indonesia and Thailand market.

  • APAC REALTY LIMITED (SGX:CLN) has deepened its South-East Asian presence with the purchase of the ERA master franchise operations for Indonesia and Thailand. The move is in line with management’s outlined IPO growth strategy and would help in the long-term diversification of its earnings base amidst challenges in the Singapore residential market.

Expecting strong mid-term growth from ERA Indonesia.

  • ERA Indonesia, a franchise model that has been in operation for 26 years, is the largest brokerage agency in the country with more than 6,900 agents. It has an estimated 10% market share in the secondary property market in Indonesia. APAC Realty would acquire the master franchisor for a purchase consideration of SGD 9.43m and also extend a convertible loan of SGD4.42m. The purchase consideration includes a 4,664 sqf office space in Tanah Abang, which has a book value of ~SGD1m. The reported net profit (FY17) of ERA Indonesia was SGD0.44m.
  • While the acquisitions seem expensive at ~19x adjusted historical P/E (excluding office property), management noted that it sees strong business growth opportunities in this market and expects to more than double the net profit in the next one to two years.
  • Key part of its growth plan is the entry into the project marketing segment. In this regard, it has formed an agreement with developer PT Intiland Development to be one of the latter’s lead agencies for future projects. ERA Indonesia was also appointed as the lead marketing agent for the first phase of 57 Promenade, an integrated mixed-use and high-rise development project in Jakarta’s CBD, jointly developed by Initland and GIC Pty Ltd, and outperformed all competitors by selling over 30% of all sold units.
  • APAC Realty also plans to list its Indonesian entity separately in the Indonesian market (~9-12 months) while retaining a majority stake in the entity.
  • Overall, management expects a healthy recovery of the Indonesia property market after mid-2019, following Indonesia’s presidential election, with the opening up of property purchases to foreigners also on the cards. In terms of commission structure, APAC Realty guided that agent commission for new launches in Indonesia is ~3.5%, higher than Singapore’s 1.5%-2%.

Thailand franchise acquired at no cost.

  • ERA Thailand has been operating since 1993, with > 400 agents, and has a reasonably good track record with c.1,000 transactions pa. Management noted that this entity is currently profit making without citing exact numbers. As the current franchise term was set to expire, APAC Realty chose to take an 80% economic interest in the entity at no additional cost, instead of extending the franchise term. Thailand ERA master franchisor CEO and managing director Mr Voradet Sivatachanon would hold the remaining 20% interest.
  • Similar to Indonesia, management sees a good opportunity in Thailand by breaking into project launches, which are mostly done by the developers themselves.
  • Currently, ERA Singapore is involved in marketing a few of Thai developer Sansiri’s projects in Singapore. Management plans to extend this relationship by helping sell Sansiri’s projects locally, and also to other regional clients. APAC Realty noted that typical agent commission for new launches is 4%, and for secondary market – 3% seller commission and 1-2% buyer commission.

Maintain BUY and Target Price of SGD 0.72, 44% upside.

  • We have not made any earnings changes pending more details. Despite the muted property market sentiment in Singapore, we expect property volume to hold up on strong pipeline of new launches and liquidity. Management has also been making a conscious effort to diversify earnings by expanding its overseas presence, strengthening training programs, while targeting the luxury residential market.
  • Valuations are relatively cheap in our view, with the stock trading ~8x FY19F P/E, and offering 8% dividend yield.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-02-12
SGX Stock Analyst Report BUY MAINTAIN BUY 0.720 SAME 0.720