APAC Realty - DBS Research 2019-11-14: Continued Weakness In Secondary Market

APAC REALTY LIMITED (SGX:CLN)

APAC Realty - Continued Weakness In Secondary Market

APAC REALTY (SGX:CLN)'s 3Q19 results below expectations; secondary market still weak; margins under pressure.
Rebound in primary transactions q-o-q; ample supply ahead.
Cut FY19-20F earnings by 17% to 23% to account for weak secondary market and lower margins.
Maintain HOLD with lower Target Price of S$0.46.

We have adjusted up our primary sales assumption and now expect 5% y-o-y decline in transaction value for FY19F from 15% decline previously, and maintain a 7% rebound in FY20F.
We now assume a steeper decline of 40% in the resale segment in FY19F, from a 35% drop previously, and to rebound by 10% (from 12%) in FY20F, after a weak FY19F. We maintain HDB resale growth of 5% y-o-y.
Overall, we expect the private residential market to decline 13.3% in FY19F, and to rebound 7.4% in FY20F.

APAC Realty's 3Q19 revenue declined 14.1% y-o-y to S$98.6m while net profit shed 47.7% to S$3.4m. The weak results were mainly due to the cooling measures implemented in July 2018 that has continued to weigh on market sentiment and buyer demand. See APAC Realty Announcements.
Net margins decreased to 3.5%, from 3.8% in 2Q19 and 5.7% in 3Q18, mainly due to higher personnel cost and marketing expenses.
Net profit accounted for 24% our previous FY19F earnings on a 3-month basis but only 58% on a 9-month basis as 1H19 earnings was weak, below our and consensus forecasts.

In terms of market segment, 3Q19 transaction value for the private primary market saw a 37.6% jump from the previous quarter but the secondary market was still flat. The leasing market surged 22.4% while the HDB resale segment eased 0.3% q-o-q.
Agent strength: As at 1 Nov 2019, APAC has about 7,034 agents, +8.4% YTD, with market share of c.23%.

ERA maintained a market share slightly below 40% in the private primary and resale segment while its market share for the HDB resale segment is slightly higher than 40% for the 9-month period.

To date, ERA has secured marketing agent appointments for 59 projects with about 20,000 new home units to be launched in FY19/20F, as compared to about 27 new project launches totaling about 13,000 units in 2018. There are also about 34,089 (including ECs) unsold units as at end 3Q19 and a potential supply of 4,900 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. For the 9-month period, new home sales amounted to c.7,500 units.
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 are expected to increase to 3% to 3.5%, vs about 1.5% to 2% in the past.

We have cut FY19F/FY20F earnings by 17%/23% to account for the still weak secondary market and also lower margins, partly offset by a slightly better primary market.
We have adjusted up our primary sales assumption and now expect a 5% y-o-y decline in transaction value for FY19F, from 15% drop previously, and maintain a 7% rebound in FY20F. We now assume a steeper decline of 40% in the resale segment in FY19F, from a 35% drop previously, and a 10% rebound (previously 12%) in FY20F, after a weak FY19F.
We maintain HDB resale growth of 5% y-o-y. Overall, we expect the private residential market to decline 13.3% in FY19F, and to rebound 7.4% in FY20F.

Target price is reduced to S$0.46 (Prev S$0.48), pegged to 12x (prev 10x) local peer vs region peers previously on FY20F earnings, since > 90% of its revenue is generated locally.
Maintain HOLD. See APAC Realty Share Price; APAC Realty Target Price.

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

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-11-14

SGX Stock Analyst Report BUY MAINTAIN BUY 0.46 DOWN 0.480