APAC Realty - DBS Research 2019-05-14: Lower Sales Projection

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APAC REALTY LIMITED (SGX:CLN)

APAC Realty - Lower Sales Projection

• APAC REALTY LIMITED (SGX:CLN)'s 1Q19 results below expectations; impact of cooling measures larger than expected.
• More project launches to partly offset lower take up rates; secondary market should improve q-o-q but weak for FY19.
• Lower sales projection for primary and secondary market.
• Cut FY19F-20F earnings by 17% each; downgrade to HOLD with lower Target Price of S$0.58.

Cut sales projection for primary and secondary market

• Cut sales projection for primary and secondary market; downgrade APAC REALTY LIMITED (SGX:CLN) to HOLD with lower Target Price of S$0.58. Our previous thesis on a recovery in the secondary market and smaller drop in primary market seems misplaced.
• We have lowered our assumption to a 15% drop in primary sales transaction value, from a 7% decline in FY19F. We expect the slower take up rate for new launches to be partly offset by higher number of project launches and higher commission rates.
• For the secondary market, we have cut our assumption to 20% decline in FY19F from a 6% growth previously, and to rebound 5% in FY20F. Sales should improve on a q-o-q basis but to expect it to be lower for FY19 as compared to FY18. We maintain HDB resale growth of 5% y-o-y.
• Overall, we expect the private residential market to decline 18% in FY19F, and to rebound 6% in FY20F.

1Q19 results weak; impact of cooling measures felt.

• The full impact of the cooling measures announced in July last year was felt in 1Q19, as a property transaction typically takes about three to six months to be reflected in the books. 1Q19 net profit tumbled 71% y-o-y while revenue declined 26.4%.

Decent pipeline; rising stockpile but secondary market remains weak in FY19.

• ERA has been appointed the marketing agent for 42 projects with about 16,500 new home units to be launched in FY19, as compared to about 27 new project launches totaling about 13,000 units in 2018.
• There are also about 38,710 (including ECs) unsold units as at end-1Q19. Secondary market should rebound q-o-q but to remain weak for FY19 vs 2018.

WHAT’S NEW - 1Q19 results below expectations; full impact of cooling measures felt

Impact of cooling measures felt in 1Q19; larger than expected.

• APAC REALTY's revenue declined 26.4% y-o-y to S$77.4m, mainly due to a 29.9% drop in new home sales and 25.4% drop in resale and rental of properties. Coupled with higher expenses, net profit of S$1.7m (-71% y-o-y; -57% q-o-q) was below expectations. While we had been prepared for property transactions to be typically impacted and reflected in the books about three to six months after cooling measures, the effect on 1Q19 was larger than expected.
• Gross margin of 12.2% in 1Q19 is similar to 1Q18 but slightly lower than 13.7% in 4Q18. Our earlier thesis was premised on our expectations of a recovery in the secondary market coupled with a smaller decline in primary market sales.

Weak results in line with the broader market.

• Based on URA data, private residential transactions declined 29.7% to 3,743 units in 1Q FY19, from 5,328 units in 1Q FY18. The secondary market saw a steeper drop of 49% y-o-y to 1905 units, while primary sales improved 16% to 1838 units.

Stable market share in terms of transaction value and agent strength.

• ERA’s overall market share was relatively stable at 35.8% in 1Q19, vs 36.4% in FY18. Agent strength of 6817 as at 13 May 19 was up 5% from the beginning of the year.

Outlook and Recommendation

Decent project pipeline.

• To date, ERA has secured marketing agent appointments for 42 projects with about 16,500 new home units to be launched in FY19, as compared to about 27 new project launches totaling about 13,000 units in 2018. There are also about 38,710 (including ECs) unsold units as at end 1Q19 and a potential supply of 5,200 units from Government Land Sale sites and awarded en-bloc sites that have not been granted planning approval yet.

More project launches to offset slower take up rate.

• Though the take up rates for new launches is expected to be slower, this should be partly offset by a bigger base with more project launches.
• Furthermore, commission rates for new projects are also on a rising trend, as developers attempt to clear old inventory and to speed up sales amid the ample supply in the market.

Increasing commission rates.

• Given the ample supply coming onstream from new launches and also stock pile from earlier launches, we expect developers to offer higher commission rates especially for the older projects. Commission rates should be able to increase to 3% to 3.5%, vs about 1.5% to 2% in the past.

Secondary market could remain weak.

• We had previously expect the secondary market to show a slight y-o-y growth as transaction activities should stabilise going forward post the cooling measures. However, 1Q19 numbers were still weak.
• Though 2Q numbers are expected to improve q-o-q, we expect overall FY19 transaction to be lower compared to a year ago.

Downgrade to HOLD with lower Target Price of S$0.58; earlier thesis of recover in secondary market seems distant for now.

• We downgrade APAC Realty to HOLD from BUY. Our previous buy call was premise on a y-o-y recovery in the secondary market and a lesser drop in the primary market. However, the secondary market segment was weaker than expected. Hence, we have cut our assumption to 20% decline in FY19F from a 6% growth previously, and to rebound 5% in FY20F. Sales should improve on a q-o-q basis but to remain weak for FY19 as compared to FY18.
• For the primary market, we have also lowered our assumption to a 15% drop in primary sales transaction value, from a 7% decline in FY19F, and maintaining forecast of a 7% rebound FY20F. We expect the slower take up rate for new launches to be partly offset by more project launches and higher commission rates for new projects, which seems to be on a rising trend. We maintain HDB resale growth of 5% y-o-y.
• Overall, we expect the private residential market to decline 18% in FY19F, and to rebound 6% in FY20F.
• On the back of the cut in transaction value assumption for the primary and secondary market, we have lowered FY19F and FY20F earnings by 17% each. Accordingly, Target Price is lowered to S$0.58, pegged to peers’ average PE of 10x.
• Downgrade to HOLD.

Key Risks to Our View:

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

Lee Keng LING DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-05-14

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