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


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.

2Q19 results below our expectations

  • 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%.

Resale weakness could dissipate from 2H19F onwards

  • 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.

Project sales on track

  • 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.

The worst could be over

  • 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.

Maintain ADD with a lower Target Price of S$0.60

  • 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
SGX Stock Analyst Report ADD MAINTAIN ADD 0.60 DOWN 0.670