PROPNEX LIMITED (SGX:OYY)
PropNex - Strength From Revenue Diversity
- PropNex (SGX:OYY)'s 1H22 revenue and PATMI were within expectations at 62%/62% of our FY22e forecast. We expect further weakness in earnings, especially from new project revenue.
- Rental was the fastest growing segment in 2Q22, rising 23% y-o-y, followed by HDB. Project marketing revenue fell 29% y-o-y due to a decline in new launches.
- We keep our FY22e PATMI forecast for PropNex unchanged.
The Positive
Resilient revenue.
- Despite the weakness in new launches, other segments of the business managed to grow, less impacted by the December 2021 cooling measure. Rental income jumped 23%, followed by HDB resale.
The Negative
Sluggish new launch revenue.
- There were only an estimated 1,548 new residential units launched in 1H22, a decline of 70% y-o-y from 5,222 units 1H21. As revenue from new launches are recognised typically six months after completion of the home sale, new launches may recover from a planned 5,183 units earmarked for 2H22.
Outlook
- Property prices will remain elevated. We believe there is a virtuous cycle underway. HDB owners may enjoy gains that are used as equity (estimate S$300k) to upgrade into the private residential market. Meanwhile, buyers of HDB resale include private property owners looking to cash out and move into HDB units. Other macro tailwinds include rising income levels, low supply, healthy developer balance sheet and higher priced land bids.
- In terms of transaction volumes, new home sales are expected to decline more than expected in 2022, from a decline of 20-30% to 30-40%. No change in PropNex volume expectations for the other segments - private resale (decline 20-25%) and HDB resale (decline 5-10%).
Other highlights
- Impact of higher interest rates. On a $1mil housing loan, a 1ppt rise in interest rates will lead to an estimated $500 increase in monthly instalment. Despite higher rates, demand in the recent AMO residential project was vibrant judging by the multiple cheques collected from buyers.
- Market share. Due to the balloting process in new launches, there can be a loss in market share despite higher customer bookings.
- Overseas expansion. Launched PropNex in Melbourne as a franchise. Developers in Australia wish to bring projects to Singapore buyers. The PropNex revenue model is percentage royalty from revenue and one-time franchise fee.
- Bad Debt provisions. 2Q22 saw a S$1mil y-o-y jump in impairment of receivables to S$1.3mil. Developers cannot complete their projects on schedule due to the pandemic, thus the delay in paying real estate agents. Any debtor crossing 365 days will be impaired as an accounting policy. The actual exposure to PropNex is only 10% outstanding, as most receivables are commissions to be paid to the agents.
- Spike in outside central region (OCR) prices. Based on average transacted per sft over the past seven months, OCR enjoyed the largest spike in prices. A 21.9% jump to S$2,073, followed by the rest of central region’s (RCR) 18.4% jump to S$2,423. Core central region (CCR) was down 2.9% to S$2,807.
- Lowest inventory in OCR. The current unsold inventory is 15,805 units. Based on average annual sales, OCR inventory is only 0.8 years of sales, followed by RCR at 1.5 years and CCR at 3 years.
Maintain NEUTRAL with an unchanged target price of S$1.74
- Our expectations are a further decline in earnings in 2H22 due to a lagged revenue recognition from limited project marketing sales in 1H22 of around 1,548 units. New launches planned in 2H22 are expected to pick up to 5,183 units. Rising HDB prices and interest rates may lead to some additional tightening measures.
- We worry the current TDSR stress test interest rate of 3.5% may be raised. Without a BTO supply lever to dampen prices, other direct intervention by HDB is also possible.
- See
- Our FY22e target price of S$1.74 and NEUTRAL recommendation for PropNex is maintained.
- Our expectation for PropNex's FY22e dividend is 9 cents or a dividend yield of 5.4%.
Paul Chew
Phillip Securities Research
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https://www.stocksbnb.com/
2022-08-15
SGX Stock
Analyst Report
1.740
SAME
1.740
