APAC Realty - RHB Invest 2020-06-15: Riding Through Market Cycles


APAC Realty - Riding Through Market Cycles

  • While COVID-19 pandemic is expected to cause a sharp slowdown in near-term volumes, we expect transactions to slowly rebound once the economy is opened up. This is on the back of resilient local buying demand, a low interest rate environment and stringent additional buyer’s stamp duty deadlines limiting developers from holding inventory.
  • Maintain BUY on APAC Realty with a lower Target Price of SGD0.50 from SGD0.60, 25% upside with c.4% yield.

COVID-19 and circuit breaker (CB) impact to be felt in 2H; Preliminary data shows signs of primary market recovery.

  • The suspension of real estate activities (physical viewings, etc.) during the CB saw April new sales plunging 62% y-o-y but recovering in May with a 75% m-o-m jump to 484 units (-49% y-o-y) based on Knight Frank data. As there is a 2-6 months’ time lag of earnings recognition from project sales, the impact on APAC Realty (SGX:CLN)’s earnings will only be felt in 3Q.
  • 1Q new sales (excluding EC’s) grew healthy 17% y-o-y with APAC Realty registering a market share of 34.8% (1Q19: 29.6%) which should contribute positively in 2Q.
  • Overall, we expect primary transaction volumes to fall 30-40% in 2020 (see report: Real Estate - RHB Invest 2020-05-29: Ample Room To Cushion A Fall; OVERWEIGHT) but expect the market to pick up towards the end of the year, backed by low interest rates, strong household balance sheets and pent-up demand.

Resale market to see a bigger short-term impact but recovery expected once economy is fully opened up.

  • Based on SRX data, private resale volumes in May were down 80% y-o-y while HDB resale volumes fell to a 30-year low. The sharp fall in volumes is understandable, as buyers in the resale market generally tend to purchase units only upon physical inspections.
  • APAC Realty also expects to receive c.SGD1.7m (13% of FY19 personnel costs) from Government on measures such as the Jobs Support Scheme, offsetting some of the fixed costs.

ERA APAC Centre fully leased, overseas contributions likely to be delayed.

  • Over last two years, ERA acquired stakes in its Indonesia, Thailand, Malaysia and Vietnam franchisees, to diversify and mitigate concentration risks. While initially we expected positive contributions from 2020 onwards, with the sudden shift in market conditions we believe it will take another two years before we see meaningful contributions.
  • On the positive side, the revamped ERA APAC centre achieved full occupancy as of the end of last year and it has minimal lease renewals due in 2020. Management will pass the entire property tax rebates as rental rebates and it has not receive many rental deferment requests.
  • Overall ERA APAC Centre is expected to contribute SGD0.5-1.0m to overall net income.

Earnings and assumption changes.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-06-15
SGX Stock Analyst Report BUY MAINTAIN BUY 0.50 DOWN 0.600