APAC Realty - RHB Invest 2019-05-14: A Weak Quarter; Keep BUY


APAC Realty - A Weak Quarter; Keep BUY

  • Stay BUY with a new SGD0.67 Target Price from SGD0.72, 23% upside plus 6.2% yield.
  • APAC REALTY LIMITED (SGX:CLN)'s 1Q19 results came in well below our and consensus estimates, dragged by sharp 4Q slowdowns in volume immediately after Jul 2018’s cooling measures.
  • Management is cautiously optimistic on the prospects ahead, as residential volumes have recovered since start 2019. The market leader position has also largely remained (overall market share by transaction value: c.36%).
  • APAC Realty's share price is likely to be supported by the > 6% yield.

APAC Realty’s weak 1Q numbers

  • APAC REALTY LIMITED (SGX:CLN)’s weak 1Q numbers were due to a plunge in resale transactions and slowdown in new launches immediately after the Government’s Jul 2018 cooling measures.
  • It has to be noted that there is a time lag of 3-6 months between sale and earnings recognition in new launches and 1-3 months for the resale market. Transaction volumes have since picked up since start 2019, with all segments (new sales, Housing & Development Board (HDB) unit resale, and rental) – except private resale, which remains subdued – seeing slight y-o-y improvements.
  • APAC Realty's overall market share position (36% of 1Q19’s transaction value) has also stayed largely stable. Consequently, management remains cautiously optimistic that earnings should improve in the coming quarters.

Strong new launch pipeline for 2019/20.

  • For 2019, the ERA Realty Network (ERA) unit has secured project marketing roles for 42 projects (~16,500 units), c.30% higher than last year. While take-up rates have slowed down in recent launches, new sales volumes are expected to remain similar to 2018 (~9,000 units) on the higher number of units available for sale and balance units from past launches.
  • Agents’ commissions for new launches have also increased 50- 75bps on developers’ incentives amid weak market conditions.
  • In the private resale market, management noted that volumes remained subdued, as sellers have yet to fully adjust their pricing expectations post the cooling measures.
  • On a slightly positive note, the HDB resale & rental market segment should see a pick-up in activity this year, as ~30,000 units are nearing their minimum occupation period, after which they become eligible for sale.

Near-term focus on increasing agent count and deepening the overseas presence.

  • ERA’s agent count has increased 12% y-o-y to 6,817 on management’s efforts to increase headcount via organic and inorganic means. APAC Realty will also continue its efforts in increasing agent productivity through rigorous training programmes, technology tools, and targeting the right market segments. Additionally, the firm will focus on growing its overseas income contributions from growth opportunities in Indonesia and Thailand.

Earnings revision.

Results And Operations Update

1Q19 net profit impacted by cooling measures, results below.

  • APAC Realty's 1Q19 gross revenue decreased 26% y-o-y due to a 30% drop in brokerage income from new home sales, as well as a 25% decline in commissions from resale and rental properties. GPM remained stable on a y-o-y basis at 12.2% but declined q-o-q. This was due to a change in the revenue mix and higher proportion of transactions executed by agents in top tier commissions.
  • Marketing and promotion expenses for the quarter rose sharply 195% y-o-y due to the absorption of Council of Estate Agencies fees for agents and higher expenses for commercial property. There was also SGD0.4m in finance costs for 1Q19 (1Q18: nil), associated with the funding of new property.
  • Overall, 1Q19 earnings came in below, accounting for 9% of our full-year estimates. We expect better profits in subsequent quarters to offset some of the shortfall.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-05-14
SGX Stock Analyst Report BUY MAINTAIN BUY 0.67 DOWN 0.720