PropNex - UOB Kay Hian 2020-08-14: 2Q20 Positive Tailwinds From COVID-19

PROPNEX LIMITED (SGX:OYY)

PropNex - 2Q20 Positive Tailwinds From COVID-19

PropNex's 1H20 results exceeded our expectations (~74% of our forecasts). With the pandemic, overall sales volume contracted, although there have been signs of a rebound in 3Q20 with Jul 20 caveats showing a spike in new/resale volumes. Management also embraced digitalisation, in anticipation of buyers shifting online.
In 2H20, PropNex expects to continue receiving some government grants and rental rebates (1H20: S$1.5m), albeit smaller amounts, thus boosting its bottom-line.

PropNex (SGX:OYY) reported 2Q20 PATMI of S$7.3m (-4.1% q-o-q, +96.1% y-o-y), bringing 1H20 PATMI to 74% of our full-year forecast. The group saw 2Q20 top-line grow to S$105.9m (-22%qoq, +15%yoy). The y-o-y growth was attributable to increase in commission income from project marketing of S$29.3m - driven by higher number of transactions post-recovery from Jul 18 cooling measures, but partially offset by decrease in commissions from agency services of S$15.4m due to the initial impact of circuit breaker.
As mentioned in previous updates PropNex - UOB Kay Hian 2020-05-19: 1Q20 A Silver Lining In The COVID-19 Crisis, the lumpy earnings (ie PATMI growing 15% y-o-y but declining 22% q-o-q) was due to the snowballing effect from the delay in Option-To-Purchase (OTPs) exercise post-Jul 18 cooling measures.
Interim dividend of 1.5 S cents/share (+20% y-o-y) was declared, representing a payout of 76.5% of 1H20 net profit. Ex-dividend date is on 24 Aug 20. See PropNex Dividend History.

Management pointed to 1H20 private new sales volumes contracting by only 8% y-o-y, despite circuit breaker (CB) measures from 7 Apr-1 Jun 20. Management attributes the resilience to a low-interest rate environment, attractive pricing (eg Core Central Region (CCR) projects), HDB upgraders (eg Rest Central Region (RCR) projects).
Management observed some CCR projects facing competition have started to discount prices. Our channel-checks suggest they include Marina One and One Pearl Bank. One Pearl Bank is selling below their launch-pricing amid competition from “lower-priced” Avenue South and “Freehold” Sky Everton. RCR projects (eg Treasure at Tampines, Parc Clematis) have seen good sales, which management attributes to HDB upgraders.
For 2020, management guided that private new sales volumes may come in at the higher-end of their 7,000 to 8,500-unit guidance (vs 2019: 9,164 units). Empirically, we are seeing a vengeance in buying post-lockdown in June (967 sold) and Jul 20 (1,071 sold) based on REALIS data which may carry into Aug 20. For period (6 Apr-9 Aug 20), PropNex has sold 1,621 units and attained an improved 52.4% market share. Sales momentum has been picking up with PropNex selling more than 100 units each week by the 11th week of the Circuit Breaker.
An anticipated strong pipeline of 29 projects (9,670 units) is lined up from 3Q20 onwards. Of this, PropNex has been appointed to 15 projects (6,602 units).

Private resales declined sharply to 933 units (-55%qoq, -61% y-o-y), which may have been due to owners postponing their decision to sell due to the discomfort of inviting buyers in for viewing, as well as mismatch between pricing expectations between buyer-and-seller. Management pointed to Jul 20 caveats in REALIS showing a sharp rebound in transaction volumes of 795 units (+137%mom) with signs of buyers returning with a vengeance, and guided for a 7,000-units ballpark estimate for 2020F.
HDB resale has also seen a large decline to 3,426 units (-42% q-o-q, -45% y-o-y), which management attributed to the restrictive effects of the circuit breaker and Phase 1 measures, and does not indicate weaker demand. Management sees HDB resale volumes coming in between 21,000-22,000 units in 2020F representing a 7-11% y-o-y decline. They also see some demand re-directed from couples applying for HDB BTOs, due to the longer construction lead time as a result of the pandemic.

PropNex's net cash accounts for 47% of its market capitalisation (S$0.27/share). Cash balances will be reduced by delayed payment of 2019 final (1.5 S cents) and special dividends (0.75 S cents) paid in Jul 20, as a result of the delay in 2020 AGM. It will also see a further reduction from 1H20 interim dividend payment of 1.5 S cents.

As show-flats were shut, PropNex reached out to consumers via digital platforms, which have translated to steadily rising sales for new launch transactions going into Apr/May/Jun/Jul 20 (70/295/475/529units).
Management sees the COVID-19 pandemic accelerating the shift of buyers online to transact (eg virtual viewings). They are also looking to digitalise more of their business processes (eg building up an improved digital database for resale/and leasing segments to enhance service quality).

Effective from 3 Jun 20, Ms Wong was put in-charge to drive engagement and build business momentum through thought-leadership and value-added content through the group's communication channels. She brings over 20 years of experience, starting out as a reporter at Channel NewsAsia, senior correspondent at The Straits Times, and was the Associate Director of Publicity, Media and Content at Colliers International.

Management acknowledged that the pandemic has temporarily derailed growth in the property segment, resulting in private home sales volume declining 37.6% y-o-y in 2Q20 after a positive first quarter. Management believes buyers will return as COVID-19 concerns ebb over time, along with a supportive low-interest rate environment and fiscal policies. They pointed to past trends where the residential market managed to recover after each crisis, with prices keeping in line with economic growth.

We raised our 2020 net profit forecast by 6%, factoring in some S$1.8m in government grants (eg Jobs Support Scheme) and rental rebates. The group has already received S$1.5m in such subsidies - boosting its 1H20 bottom-line.

Maintain BUY on PropNex with a raised target price of S$0.69 (previously S$0.65), based on 12x 2020F PE, with reference 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/ 2020-08-14

SGX Stock Analyst Report BUY MAINTAIN BUY 0.69 UP 0.650