APAC Realty - DBS Research 2019-08-06: Secondary Market Still Weak

APAC REALTY LIMITED (SGX:CLN)

APAC Realty - Secondary Market Still Weak

APAC Realty's 2Q19 results dragged by weak sales in both primary and resale markets; below expectations.
Market share in primary market fell to c.30%.
Ample supply; more project launches to offset slower take up rate.
Cut FY19F/FY20F earnings by 28%/23%; maintain HOLD with lower Target Price of S$0.48.

We have lowered our sales projection for the secondary market, and now expect sales to drop by 35% y-o-y in FY19F, from 20% decline previously, and to rebound by a higher 15% (previously 5%) in FY20F, after a weak FY19F.
No change in assumption for primary market and HDB resale segments. In the primary market, we are still expecting a 15% drop, and a 7% rebound FY20F. We maintain HDB resale growth of 5% y-o-y.
We expect the slower take up rate for new launches to be partly offset by higher number of project launches and higher commission rates. During the previous round of major property cooling measures in 2015, APAC REALTY LIMITED (SGX:CLN)’s earnings had doubled in both 2016 and 2017. For FY20F, we expect earnings to grow 16%, on the back of a muted economic growth outlook. Maintain HOLD call.

ERA has been appointed the marketing agent for 51 projects with about 19,000 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 35,538 (including ECs) unsold units as at end-2Q19.

We are less optimistic in the take up rate of new launches as well as transaction activities in the resale market.

APAC Realty's 2Q19 results below expectations. 2Q19 revenue saw a 29.8% y-o-y drop to S$85.7m, mainly stemming from a 29.2% decline in resale and rental of properties, and a 32.9% drop in new home sales. On a q-o-q basis, revenue was up 11% from a weak 1Q19. Coupled with higher expenses, 2Q19 net earnings of S$3.3m (-57% y-o-y, +89% q-o-q) accounted for 16% of our full year forecast, below expectations.
An interim DPS of 0.75 Scts was declared, representing 53% of 1H19 earnings. See APAC Realty's dividend history.

The Singapore property market regulatory overhang and muted economic outlook have further weighed on demand for residential properties. In 1H 2019, there was a 50% y-o-y drop in transaction volume in private resale residential transactions to 4,321 units. The primary market saw a slight increase of 6% to 4,188 units while the HDB resale segment gained 7% vs 1H 2018.

APAC Realty’s weaker sales in the primary market segment as compared to the overall market was mainly due to a reduction in market share to c.30% in 1H 2019, vs close to 40% in the last three years, as the landscape becomes more competitive.

To date, ERA has secured marketing agent appointments for 51 projects with about 19,000 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 35,538 (including ECs) unsold units as at end 2Q19 and a potential supply of 7,100 units from Government Land Sale sites and awarded en-bloc sites that have not been granted planning approval yet.

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 speed up sales amid the ample supply in the market.

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

We assume a steeper drop in transaction values in the resale segment. No change in assumption for the primary market and HDB resale segments.
We now assume a steeper decline of 35% in the resale segment in FY19F, from 20% drop previously, and to rebound by a higher 15% (previously 5%) in FY20F, after a weak FY19F. For the primary market, we are still expecting a 15% drop in transaction value, and a 7% rebound FY20F. We maintain HDB resale growth of 5% y-o-y. 2H19 is expected to be better than 1H19, on the back of the ample supply, but still below that of 2H18 as the economic outlook is muted.
On the back of a cut in transaction value assumption for the secondary market and lower margins, we have lowered FY19F and FY20F earnings by 28% and 23% respectively. Accordingly, our Target Price is cut to S$0.48, pegged to peers’ average PE of 10x on FY20F earnings.
In the previous round of major property cooling measures in 2015, APAC Realty’s earnings had doubled in both 2016 and 2017. For FY20F, we expect earnings to grow 16%, on the back of a muted economic growth outlook. Maintain HOLD.

Lee Keng LING DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-08-06

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