PropNex - Phillip Securities 2022-11-14: Expect Growth To Return In 2023; Upgrade To BUY

PROPNEX LIMITED (SGX:OYY)

PropNex - Expect Growth To Return In 2023

PropNex (SGX:OYY)'s 3Q22 result was a huge earnings beat. 2022-to-date revenue and PATMI were 96%/96% of our FY22e forecast (excluding one-offs). We underestimated PropNex’s market share gains especially in private resale, the increase in agent size and rise in selling prices.
Rental remained the fastest growing category. Revenue jumped 76% y-o-y to $48mil. The rental market has been extremely tight this year with borders reopening.

We raise our FY22e PATMI forecast for PropNex by 34%. Our FY22e target price for PropNex is raised from S$1.74 to S$2.00. The NEUTRAL recommendation is upgraded to BUY.

Despite the 28% y-o-y drop to 3,961 in total private resale volumes in 3Q22, PropNex managed to grow revenue by 11% to S$785mil. Reasons for the market share gains include the growth in the sales force and deliberate efforts to focus on resale.
The price difference and lack of available units between new launches and resale helped stimulate resale volumes.

Revenue from project marketing declined 12% y-o-y to S$88mil. The dearth of new launches and inventory has been a drag to revenue. New units transacted in Singapore (excluding EC) are down 38% to 2,187 units in 3Q22.
With a balloting process, market share will also be determined by random chance.

After two cooling measures and higher interest rates, we do expect some softening in buying interest from euphoric levels. Nevertheless, we remain upbeat that the key drivers supporting selling prices and demand are intact, namely
- rising residential population,
- low unemployment rates,
- new household formations (e.g. 25k marriages),
- rising land and construction cost,
- attractive HDB grants,
- low inventory level (1.5 years vs 3 year average) and
- return of foreign buyers.
On the transaction volumes, the rebound in new launches for FY23 will support project market sales.

Impairment loss of S$1.1mil and S$3.7mil derecognition of commission trade payables. Developers can only use 5% of project funds for marketing, agency commission and show flats. Once the 5% is exceeded, they are unable to pay the commission until the temporary occupation permit (TOP) of the project. Any outstanding commission above 12 months will be impaired as an accounting policy.
New land supply. Developers are still cautious due to the high selling prices and have inventory to sell in 2023. If the take-up rate of new launches in 2H23 is healthy, developers will likely resume their land banking.
Impact of cooling measure and high interest rates. Despite cooling measures, residential prices did not correct due to fewer speculators in the current cycle.
Foreign demand. Demand from foreigners has recovered from 9.7% in 2021 to 13.1% in 2022 for CCR. Singapore stands out as a place for a 2nd home.
Larger growth in salesforce. PropNex’s salesforce rose around 12% to 12,065 agents, as at 2Nov22. The 1,269 increase in agent size is higher than the next three competitors combined growth of 1,026 agents (or 6%).
Dividends. PropNex's dividend policy is 70-80% payout ratio.

Upgrade PropNex from NEUTRAL to BUY with a higher target price of S$2.00 (previously S$1.74). We raise FY22e PATMI by 34% to S$58mil.
Dividend yield is attractive at almost 6%, ROE of and we expect growth to resume as new launch units increase in FY23e.
See
We expect earnings growth to return in FY23e. New home sales will rebound with the expected 11,300 new launches (FY22: 4,500). Resale recovery will be from widening prices compared to new launches. The upside in volumes will be determined by foreign demand. Rental volumes will be supported by the expected surge of TOP units in FY23.

Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2022-11-14

SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 2.00 UP 1.740