PropNex - UOB Kay Hian 2020-05-19: 1Q20 A Silver Lining In The COVID-19 Crisis

PROPNEX LIMITED (SGX:OYY)

PropNex - 1Q20 A Silver Lining In The COVID-19 Crisis

PropNex's 1Q20 results came in better than expectations, at 36% of our full-year forecast. With COVID-19, management sees sales volume contracting and financial impact from 2H20. However, preliminary data suggests PropNex is gaining market share during the circuit breaker period on new launches with virtual tours.
PropNex is well-positioned to tide the COVID storm with an enviable S$89.8m net cash (48% of its market cap).

PropNex (SGX:OYY) reported 1Q20 net profit of S$7.6m (-7.9% q-o-q, +278.8% y-o-y), representing 36% of our full-year forecast. Revenue increased to S$135.6m (+3.5% q-o-q, +82.7% y-o-y), mainly due to higher commission income of S$15.9m from agency services 9m and S$45.8m from project marketing services. The increase was mainly due to more transactions completed in 1Q20 following the recovery of the private residential market from Jul 18 property cooling measures.
We reckon the strong y-o-y jump in net profit is due to snowballing effect from the delay in the exercising of OTPs (ie which we had mentioned in our quarterly updates) as well as a low 1Q19 base which was still reeling from Jul 18 cooling measures.

For 1Q20, private residential new sales rose 17% y-o-y to 2,149 units, which is pre-cursor to a strong 2Q20 given the 8-12 weeks’ lag in sales recognition. However, the onset of COVID- 19 and circuit breaker (CB) measures led management to believe that 2020 volumes could decline by about 20% y-o-y. The grim outlook could be partially offset by possible market share gains (if permanent) during the CB period.
During 6 April to 17 May 20, PropNex attained an improved 66.4% market share (vs usual 45-50%) based on the company’s tracking of its 41 active projects (ie with at least one sale). Despite the majority of buyers did not visit the actual show flats, PropNex closed 207 transactions during the six weeks. While selling through virtual tours was initially slow, more transactions eventually went through each week (16, 16, 21, 40, 51, 63 sold) into the CB period.
Management expects private new sales to continue playing a strong revenue contributor by at least a third of total revenue (vs 45% of brokerage revenue in 1Q20) with an anticipated strong pipeline of 30 projects (10,048 units) from 2Q20. Of this, PropNex has been appointed to 16 projects (6,980 units), adding on to its backlog of 89 projects it is currently marketing.

Private resale saw a strong 1Q20 showing with 2,080 units sold (+12% y-o-y). However, with the onset of COVID-19, many owners are postponing the decision to sell (due to discomfort inviting potential buyers to their homes) even before the imposition of CB measures.

Management noted HDB resale volumes tend to be seasonally weaker in the first quarter of the year due to Chinese New Year and March school holidays. Despite the strong 1Q20 (5,893 units sold), management still expects HDB resale volumes to decline 7-11% y-o-y (2019: 23,714 units sold) as buyers defer large-ticket items.
Management expects HDB resale prices to remain largely stable in 2020.

PropNex further grew its net cash (+10.1% q-o-q), generated mainly from operating activities. Net cash now represents 50% of its market capitalisation (S$0.24/share). The company has not announced any changes to its previously announced intention of distributing at least 50% of its net profit semi-annually.

PropNex's management guided private residential sales volumes could fall to 14,000 units (-27% y-o-y), and expects the impact to mostly be reflected in the group's 2H20 financial performance. Management also sees CB measures hitting resale volumes harder as buyers are not able to be physically present to make inspections.
On the other hand, new-sale buyers are protected from any defects found during the 12-month defects liability period (PLD) against the developer. Some S$80m in commissions for property transactions in 2019 has also been carried forward, which partly contributed to the higher transactions completed in 1Q20 (and will provide a boost in the subsequent quarters).
In response to the introduction of social distancing measures, the group has been proactively reaching out to consumers and salespersons via online solutions, such as live-streaming of consumer seminars and salespersons' training online during the CB period.

We reduce our 2020-22 net profit forecasts by 4.7%, 1.9% and 3.1% respectively, factoring in lower transactions recognised for private new sales (by 10% each in 2020- 21), private resale (by 25% in 2020), and HDB resale (by 10% in 2020).
Maintain BUY on PropNex with a lower target price of S$0.65 (previously S$0.68), based on 12x 2020F PE, pegged to its closest comparable, APAC Realty (SGX:CLN) (11x) which is also pre-dominantly Singapore-focused and similar in terms of commission structure and operating segments.
See PropNex Share Price; PropNex Target Price; PropNex Analyst Reports; PropNex Dividend History; PropNex Announcements; PropNex Latest News.

Loke Peihao UOB Kay Hian Research | Adrian Loh UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-19

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