APAC Realty - CGS-CIMB Research 2019-08-05: Reality Strikes But Hope Springs Eternal

APAC REALTY LIMITED (SGX:CLN)

APAC Realty - Reality Strikes But Hope Springs Eternal

APAC REALTY LIMITED (SGX:CLN)'s 2Q/1H19 profit of S$3.2m/S$5.1m was below our expectations due to subdued buyer demand, especially in the resale market.
We maintain our transaction volume forecast for primary sales in 2019F but lower the forecast for private resale in line with the weakness seen in 1H19.
Maintain ADD with a lower Target Price of S$0.60 based on 10x FY20F P/E and DCF.

APAC REALTY LIMITED (SGX:CLN)'s 2Q/1H19 profit attributable to shareholders declined to S$3.2m/S$5.1m (-56.8%/-62.5% y-o-y), below our expectations due to subdued demand in the resale market and lag in profit recognition of project sales. While 1H19 GP margin of 12% was stable, net profit margin declined to 3.1% (6.0% in 1H18) due to the impact of largely fixed operating expenses.
APAC Realty's 1H19 DPS of 0.75 Scts (2.0 Scts in 1H18) was lower than our expectation due to weaker earnings and represents a dividend payout ratio of 53%.

APAC Realty recorded S$40.0m (-40% y-o-y, +19% q-o-q) in revenue from resale transactions in 2Q19 amid more cautious buying sentiment owing to a weaker economic outlook. In 1H19, the Urban Redevelopment Authority (URA) recorded 4,321 (-50% y-o-y) private resale transactions, below our expectation.
On a q-o-q basis, 2Q19 volumes rose 27%, indicating some stabilisation in the market. Post 2Q19 results, we lower our 2019 resale volume assumption to a c.30% y-o-y decline, albeit penciling in a slight uptick in 2H19F, in line with APAC Realty’s expectation of a gradual improvement in resale volumes.

APAC Realty's 2Q19 revenue from new launches was S$23.1m (-33% y-o-y, -3% q-o-q) due largely to a lag in revenue recognition. URA primary home sales volumes showed a 6% y-o-y increase to 4,188 in 1H19, in line with our expectations. However the slower recognition of sales resulted in a decline in project revenue.
We continue to expect an improvement in sales volumes in 2H19F for Singapore due to the stronger pipeline of new project launches.

Following a disappointing 1H19, we think APAC Realty's earnings will improve in 2H19F due to the industry's strong sales pipeline and gradual improvement in the resale market; as of May, APAC Realty has secured marketing agent appointments for 42 projects with c.16,500 units scheduled for sale in FY19.
We further think that after trough earnings in FY19, APAC Realty's earnings will pick up in FY20F on the back of improved volumes.

As we lower our assumptions on APAC Realty's resale transaction volume, market share in the primary sales segment, and dividend payout ratio, our FY19-21F net profit forecasts decline by 11.3-18.9%.
Our Target Price dips to S$0.60, still based on an average of 10x FY20F P/E and DCF valuation.
Stronger/weaker transaction volume growth continue to be potential upside/downside catalysts for its share price.

Ervin SEOW CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-05

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