APAC Realty - DBS Research 2020-08-14: Expect A Weak 2H20

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APAC REALTY LIMITED (SGX:CLN)

APAC Realty - Expect A Weak 2H20

• Strong surge in APAC Realty's 1H20 net profit, above expectations.
• 2H20, especially 3Q20, to bear bulk of impact from COVID-19.
• Supply still healthy despite fewer project launches.
• Maintain HOLD with lower Target Price of S$0.40.

Strong surged in APAC Realty's 1H20 net profit, above expectations

6% y-o-y increase in total revenue.

• APAC Realty (SGX:CLN)'s 1H20 group revenue increased 6% y-o-y to S$172.8m, despite prevailing property cooling measures and the impact from the suspension of real estate business from 7 April to 1 June 2020 during the “Circuit Breaker Period”. This was primarily due to higher brokerage income contribution from new home sales, and to a lesser extent, resale and rental of properties.

Improvement in net margins.

• APAC Realty's net margins improved to 4.5% from 3.1% in 1H19. The was mainly due to
  1. lower finance costs as a result of loan repayments and lower bank interest rates;
  2. lower marketing and recruitment expenses in the light of the Circuit Breaker Period; and
  3. unrealized exchange gain on other receivables.

Strong surge in net profit, above expectations.

• On the back of the higher revenue and improved net margins, APAC Realty's 1H20 net profit surged 52.8% y-o-y to S$7.7m

0.75cts DPS declared.

• A 0.75cts DPS was declared, representing an annualized dividend yield of c.4%.

Agent strength:

• As at 30 June 2020, APAC Realty has about 7,221 agents, +3.6% YTD, with market share of c.23%.

APAC Realty's market share:

• For the private residential segment, ERA’s share was 27.7% in 1H20, similar to 27.2% in 1H19. ERA’s market share in the private and HDB resale market was 42.2% in 1H20, an improvement from the 40.3% in 1H19.
• Overall, ERA has maintained a healthy 38.3% share of Singapore’s residential property market in 1H20, compared to 37.5% in 1H19.

Supply still healthy despite fewer project launches:

• As at 13 August 2020, ERA has launched 15 projects YTD, vs 43 projects launched in year 2019. There are 27 more projects slated to be launched during the rest of 2020 and 1H 2021.
• So far, about 20% of project sales were conducted via virtual sale. However, it is more difficult to conduct virtual sale for the resale segment as buyers would prefer to physically view the property before making any purchase.

APAC Realty - Outlook

2H20, especially 3Q20, to bear bulk of impact from COVID-19.

• Most of the impact from the contraction of market volume during the "circuit breaker" period will be reflected in the group's financial performance in the second half year. Third quarter is expected to be the worst hit, given the time required for completion of real estate transactions and time lag in revenue recognition.
• For the private rental housing market, leasing demand, and consequently rents, may remain under pressure on the back of the weak economy and fewer expatriates coming to Singapore as border restrictions remain in place. Furthermore, some expatriates may opt for cheaper housing options as some may be facing pay cuts or given smaller housing packages in the current macroeconomic uncertainties.

Overseas expansion gaining traction, though contribution still small.

• The Indonesian government has proposed a new law under the Omnibus Bill that will enable foreign investors to purchase and own property in the country with fewer restrictions. At present, foreigners are unable to buy the land under which properties have been built and can only lease Indonesian properties. However, the proposed law would make it possible for foreigners to own strata-titled apartments and condominiums. ERA has two projects in Indonesia, to be launched soon.

APAC Realty - Earnings & Recommendation

Raised sales assumption mainly for the primary market segment; HDB resale flat.

• We have raised APAC Realty's FY20F and FY21F earnings on the back of the strong 1H20 results. We have upped our sales assumptions mainly for the primary market segment in FY20F. We are now projecting a smaller 21.6% y-o-y drop (vs -33.5% previously) in transaction value for the private primary market in FY20F, followed by a slight rebound of 3% in FY21F.
• The HDB resale market is expected to remain flat in FY21F, vs a 5% y-o-y decline in FY20F. We have also assumed ERA’s market share to revert to c.35% in FY20F and FY21F, from c.33% last year.
• However, our Target Price for APAC Realty is lowered slightly to S$0.40 (prev S$0.41) as we lowered our valuation peg to 11.4x PE on FY21F earnings, which is at -1SD (previous at average level) of its 5-year average PE, given a weak global economy and expectations of a weak 2H20.
• See APAC Realty Share Price; APAC Realty Target Price; APAC Realty Analyst Reports; APAC Realty Dividend History; APAC Realty Announcements; APAC Realty Latest News. 
• Maintain HOLD on APAC Realty.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-08-14

SGX Stock Analyst Report BUY MAINTAIN BUY 0.40 DOWN 0.410