PropNex - UOB Kay Hian 2019-02-27: 4Q18 Gains Market Share With Expanded Sales Force

PROPNEX LIMITED (SGX:OYY)

PropNex - 4Q18: Gains Market Share With Expanded Sales Force

PropNex achieved record net profit of S$19.4m in 2018 (+19.3% y-o-y), on an expanded sales force (+12.4% y-o-y).
For 2019, PropNex has been appointed as one of the agencies to market 37 launches (c.16,000 units). HDB resale and private resale volumes will be boosted by a doubling of HDB owners meeting MOP.
PropNex has an asset-light business model with high ROE of 29.1% for 2019. The stock provides attractive dividend yield of 6.2% and net cash/share of S$0.20.
Maintain BUY. Target price: S$0.66.

PROPNEX LIMITED (SGX:OYY) reported 4Q18 net profit of S$1.8m (- 57.7% y-o-y), bringing 2018 net profit to 92% of our forecast. 4Q18 revenue declined 16.4% q-o-q to S$83.0m due to lower number of units transacted in 3Q18.
Revenue recognition happens two months after signing the option to purchase when buyer exercises the option to purchase. Thus, the negative impact from cooling measures introduced in Jul 18 was only felt in 4Q18.

As at 25 Feb 19, PropNex maintained its lead with 7,513 sales persons (13% larger than the second-largest player, APAC REALTY LIMITED (SGX:CLN)). PropNex has grown its sales force by 12.4% in 2018, which included the crossover of 11 team leaders from other agencies. Management attributes the sales force growth to robust training, development programmes and the culture of sharing.
PropNex will be absorbing agents from Global Alliance Property, the eighth-largest agency with 445 salespersons. We believe further industry consolidation is on the way amid margin pressure faced by smaller agencies. PropNex is the "preferred suitor" among smaller agencies as it provides greater opportunities and long-term growth for the target's sales people.

PropNex was involved in 31 new projects in 2018 (of which 26 appointments at the initial launch). Of these, PropNex led in terms of the number of units sold in 21 of the 26 new launches, which included Whistler Grand, 3 Cuscaden, Belgravia Green, Kent Ridge Residences, Parc Esta and Mayfair.
The board has recommended total dividend of 3.5 S cents, which comprises 1.5 S cents final dividend and 2 S cents special dividend. This implies a payout ratio of 66.7% for 2018, and dividend yield of 6.2%.

We like PropNex for its asset-light business model and high ROE of 32.7% for 2018. There is diversification across multiple revenue streams, of which 41% is recurrent (HDB resale: 18%, landed: 6%, rental: 17%). The company has S$75.7m cash and debt-free. The stock is backed by net cash of S$0.20/share.

There is an estimated line-up of over 50 new launches by developers. For 2019, PropNex has been appointed for 37 projects to-date with 16,000 units to be launched. Management expects demand in the private residential market to be stable in 2019 as displaced en bloc owners look for replacement homes.
Transaction volume in the HDB resale market increased 4.6% to 23,099 units in 2018. The number of HDB owners meeting the minimum occupation period (MOP) of 5 years will double to 30,000 in 2019, which provides a boost to transaction volume for HDB resale market and upgrading to private residential properties.

PropNex is providing HDB owners an alternative option to market their housing units through its new service, HDB Auction. There are over 1m HDB owners in Singapore with 22,000 and 23,000 HDB resale transactions respectively in 2017 and 2018 respectively.
HDB Auction provides an additional platform for public housing sellers to secure the right buyers. The platform is particularly useful for divorce cases and property under estate. PropNex’s inaugural HDB Auction will be held on 5 Apr 19.

PropNex continued to enlarge its regional reach. Currently, the group has 1,300 salespersons across Indonesia (1,000), Malaysia (200) and Vietnam (100 in Ho Chi Minh City).

We fine-tune our net profit estimates by -5% to +4% for 2019-21, factoring in latest data points and our outlook on PropNex's transaction volumes across new sale, resale and leasing segments.

Maintain BUY and target price of S$0.66, based on DCF (9.75% required return, 0% terminal growth) and 2019F PE of 10x with reference to its closest comparable, APAC Realty (predominantly Singapore-focused, and similar in terms of commission structure and operating segments).

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-02-27

SGX Stock Analyst Report BUY MAINTAIN BUY 0.66 UP 0.650