• Stay NEUTRAL and SGD0.75 TP, 7% downside. Morgan Stanley Private Equity (MSPE) has acquired majority stake in APAC Realty from Northstar Group at SGD0.57/share – a 29% discount to the closing price. MSPE will make a mandatory offer at the same price to all unitholders. We recommend unitholders to not accept this general offer as it is significantly below our TP and long-term value. While the share price is likely to see a kneejerk reaction, we see SGD0.65 and below as a good long-term entry level.

• Transfer of major shareholder. MSPE announced the acquisition of a c.59.8% stake from Northstar, the group that led the buyout of APAC’s ERA Singapore from Hersing Corp for SGD130m in 2013 (see Northstar buyout for details). Since then, Northstar has enjoyed a steady stream of annual dividends and will be exiting the investment at an estimated 56% gains over its purchase price (excluding dividends). We believe the entry of MSPE – one of the world’s largest investment managers (USD1.6trn assets under management as at end Dec 2021) – is likely to bring in more M&A opportunities for the company and will help further in its Asia-Pacific expansion plans. The management team – Executive Chairman Jack Chua, key Executive Officer Eugene Lim, and CFO Poh Chee Yong (who collectively hold >10% of APAC) – will not be tendering their shares and remain committed to its long-term growth.

• Offer an opportunistic one and undervalues the long-term potential. We believe the offer price of SGD0.57/share (6x FY21F and 9x FY22F P/Es) is low and significantly undervalues APAC’s long-term potential. The move comes amidst the latest round of cooling measures (Dec 2021) that is impacting sales volumes with an expected 20-30% decline in overall transaction volumes this year. However, we note that the underlying Singapore property market fundamentals remain robust and well supported by healthy GDP growth and strong household balance sheets. In our view, Northstar’s exit, which comes after >8 years of initial investment, is possibly to redeploy the proceeds into other market opportunities.

• Attractive 6% yield and net cash position. We believe downside risks to share price are limited by APAC’s attractive dividend potential, asset-light business model and net cash position, which puts the company in a good position to ride out any near-term volatilities. Management has also set a target to increase its agent count to 10,840 by 2025 – a 10% CAGR growth – along with improving its technology capabilities.

• We assign an ESG Score of 2.9 out of 4.0 based on our proprietary in- house methodology. As this score is in line – one notch below our median score – we have not applied a 2% discount to our DCF-derived intrinsic value.

Source: RHB Research - 26 Apr 2022