PropNex - UOB Kay Hian 2022-08-11: 1H22 Weaker Results As Expected But 2H22 Should Be Stronger

PROPNEX LIMITED (SGX:OYY)

PropNex - 1H22 Weaker Results As Expected But 2H22 Should Be Stronger

PropNex reported a 13% y-o-y decline in PATMI, which was largely in line with our estimates. Its results were negatively impacted by a lack of new property launches in 1H22 as well as higher staff costs and impairments. However, 2H22 should see sequentially higher launches which will benefit PropNex.

PropNex's 1H22 interim dividend of S$0.055 was better than expected, and implies an annualised yield of 6.6%. Maintain BUY. Target price: S$2.07.

PropNex (SGX:OYY) reported 1H22 results that were in line with our expectations, with PATMI falling 13% y-o-y to S$27.3m and accounting for 48% of our full-year estimate.
PropNex saw a 19% y-o-y decline in project marketing revenue due to a lack of new launches in 1H22; however, this was somewhat offset by its other businesses – notably, the rental and private resale segments saw 28% and 12% y-o-y increases in revenue respecctively.
An interim dividend of S$0.055 was declared (75% payout vs our expectation for 70%).

During the analyst call, PropNex did not rule out the potential of more cooling measures in light of the continued strong price increases for both private and HDB segments.
For the private residential segment, it believes that the Total Debt Servicing Ratio may be tightened.
Of greater concern is the HDB resale segment given the 12% y-o-y price increase last year and this year’s potential for a 10% y-o-y increase, which is not politically palatable, in our view.

According to PropNex's management, 2023 will see a significant amount of new property launches due to the recent increase in government land sales as well as the higher success rate of en bloc sales. The increased supply coming into the market could cause property prices to soften in the medium term.

With 15,805 unsold units as at end-2Q22, it may appear that this could be a turning point for the Singapore residential market given that the higher levels of government land sales in the past 6-9 months (which will attain planning permission in the medium term), together with successful en bloc sales, will add on to the stock in 2023.
Nevertheless, we note that the unsold stock is unevenly distributed with only 4,386 units unsold in the Outside Central Region (OCR) (or < 1 year of demand) while the Core Central Region (CCR) has slightly over 6,000 units (or around 3 years of demand).

Despite the lack of significant new property launches in 1H22, PropNex’s revenue recognition for its project marketing segment should be strong in 2H22 due to timing differences. Properties of note that were launched in 1H22 include Liv@Mountbatten (37% of its units sold by PropNex), Picadilly Grand (47% sold by PropNex) and Amo Residences (52% sold by PropNex).
In addition, we highlight that out of the 30 new residential properties that are slated to be launched in 2H22, PropNex has been appointed as marketing agent for 27 of them, which thus underlines the potential for better performance in 2H22. In stark contrast to the 30 slated for launch in 2H22, only 9 new properties were launched in 1H22.

PropNex highlighted that with the easing of COVID-19-related travel restrictions, as well as other political issues in North Asia, foreign buyers have returned to the Singapore property market. In particular, the Core Central Region (CCR) continues to see the highest level of interest with 13% of all new homes being bought by foreigners in 1H22.

No changes to our earnings forecasts. We maintain our BUY rating on PropNex with an unchanged P/E-based target price of S$2.07. Our target P/E multiple of 11x is 1 standard deviation above the company’s historical P/E average of 7.8x.
We believe that PropNex’s prospects remain strong especially as we head towards 2023, which is expected to see an increased supply of private residential units hitting the market.
See
Inexpensive metrics. Given the company’s net cash position of S$134m (prior to payment of the interim dividend), we note that PropNex’s ex-cash P/E is only 8.6x. During 1H22, PropNex generated nearly S$18.4m in free cash flow which, on an annualised basis, represents around 8% free cash flow yield.
Catalysts:
- Strong sell-through of new property launches in 2H22.
- Higher-than-expected final dividend for 2022 which will indicate PropNex’s willingness to return cash to its shareholders.
Key risks to PropNex include a fall-off in property transactions due to higher interest rates and cooling measures in 2H22.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-08-11

SGX Stock Analyst Report BUY MAINTAIN BUY 2.070 SAME 2.070