PropNex - DBS Research 2021-09-17: Take A Pause; Initiate Coverage With HOLD

PROPNEX LIMITED (SGX:OYY)

PropNex - Take A Pause; Initiate Coverage With HOLD

We are initiating coverage on PropNex (SGX:OYY) with a HOLD recommendation and target price of S$1.83. While the property market continues to be “on fire” in the near term, we believe our HOLD recommendation is justified on its rich valuations as we believe that the risk of potential policy intervention to cool the market is high.
Our target price of S$1.83 for PropNex is based on 12.0x FY22F P/E, which is close to +2 standard deviation of its historical mean. We have applied a +2 standard deviation peg to reflect the current strong residential property market sentiment in Singapore.

We are expecting dividend payouts of 10.0cents/share for FY21F and FY22F, representing decent dividend yields of 5.6%.

PropNex's share price is trading at 11.7x FY22F P/E, which is close to its all-time high valuation and +2 standard deviation of its historical mean. When compared to its peers, it is trading at a 12.0% premium to its closest peer, APAC Realty (SGX:CLN), and is in line with its two other international peers’ average of 11.8x.
Despite the hot property market, we believe that there is a risk of property cooling measures ahead. The Singapore residential property price index (PPI) is up 8.9% since the last set of cooling measures in 2018, and the last time the cooling measures were invoked in July 2018, the PPI had risen 9%. In the past year, the PPI had risen by 7.1%.

Barring property cooling measures, we believe that property prices could continue increasing in 2022. Our view is premised on a combination of factors such as pent-up demand for residential property, more property upgrades due to higher property prices, the low interest rate environment, construction delays, smaller pipeline of new launches, and a depleting inventory of unsold new launches.
We are expecting total transaction value to increase by 6.3% in FY22F and believe that PropNex will continue to ride on the strong property market through its expanding market share in the various segments. In FY20, PropNex reported it had a market share of 48.8% in the private new launch market, 48.3% in private resale, and 57.3% in HDB resale. We are projecting a slight increase in its market share to 50.5% (private new launches), 50.5% (private resale), and 58.5% (HDB resale) in FY22F due to the market leader effect.

Private residential new launches have slightly higher gross profit margins, and we are projecting slight pressure on PropNex’s gross profit margins due to a higher revenue mix from the resale segment. We expect gross profit margins to decline from 11.1% in FY21F to 10.9% in FY22F due to the higher contribution from the resale segment.

Initiate with a HOLD recommendation and target price of S$1.83. While the property market continues to be “on fire”, we believe our HOLD recommendation on PropNex is justified given its rich valuations in the face of potential property cooling measures. In addition, while the lower supply of new launches is a shot in the arm for property prices and the resale market, it is expected to only weigh slightly on PropNex’s margins.
Our target price of S$1.83 is based on 12.0x FY22F P/E, which is close to +2 standard deviation of its historical mean. We used a +2 standard deviation peg to reflect the strong ongoing residential property market sentiment in Singapore.
We are expecting dividend payouts of 10.0cents/share for FY21F and FY22F, implying dividend yields of 5.6%.
When compared to its peers, PropNex is trading at a 12.0% premium to its closest peer, APAC Realty (SGX:CLN), and is in line with its other two international peers.

Key risks to our recommendation include government property cooling measures, a rise in interest rates, delays in new launches due to lockdowns, tightening of foreign workers policy in Singapore, and the rise of disruptors in the industry.
See

Wei Le CHUNG DBS Group Research | Lee Keng LING DBS Research | https://www.dbsvickers.com/ 2021-09-17

SGX Stock Analyst Report HOLD INITIATE HOLD 1.83 SAME 1.83