- Downgrade to NEUTRAL from Buy, with an unchanged TP of SGD0.75, 6% upside. APAC Realty posted a strong set of 1H results but we expect 2H net profits to drop 50% on the back of lower transaction volumes. While we anticipate Singapore property prices to remain resilient, transaction volumes are expected to fall from limited new launch inventory and rising interest rates. Share price rebounded 15% over the past month and we expect it be more range bound in near-term from lack of strong catalysts.
- Expecting a 50% decline in 2H. In 1H net profits were down 3% YoY to SGD16.6m as APAC managed to ride on relatively resilient market conditions at the end of last year and 1Q this year. Key to note: There is a typical time lag of 2-6 months for income recognition of new launches which is one of its key profit drivers. As we expect overall new sales transaction volume to decline 30-40% this year from limited new launches and interest rate increase, this should have a more prominent impact on its profits for 2H. Transaction volume in secondary market is also expected to decline 10- 15%. The company announced an interim dividend of 3.5 cents (75% pay- out ratio) which was a positive surprise.
- Slight decline in the overall market share. Real estate agency ERA’s estimated market share in new sale segment dipped slightly to 30.6% (vs 32.3% in 1H21) and private resale market stood at 41.9% (vs 43.8%). This was due to an increase in industry competition as well of recruitment of more new agents which management noted will take time to bear fruit. The company is implementing a host of new strategies, including providing more training and beefing up its tech tools to help raise productivity of its agents as well as to retain and attract agents. Another focus area has been its recently setup Capital Markets & Investment Sales division which raked in SGD26m of transactions in four months. The group was also the marketing agent for biggest en-bloc so far this year Chuan Park which was sold for SGD890m. APAC’s commission from such transactions is typically 0.8-1%
- Overseas market contributions still lukewarm. Overseas contributions remain small with associate contributions of SGD0.3m in 1H. These came mainly from Vietnam and Indonesia while Thailand is yet to turn profitable. The company has fully refurbished ERA APAC centre (formerly Hersing centre) which will be mostly used by the agents for their operations. Post consolidation of operations (and exit of Mountbatten Road premises by Feb 2023) should result in cost savings of c.SGD1.0m pa.
- We raise FY22-23F net profit 1-2% by tweaking our volumes assumptions. APAC’s ESG Score of 2.9 out of 4.0 (based on our proprietary in-house methodology) is one notch below our country median score, thus we applied a 2% discount to our DCF derived intrinsic value. Our key risks and drivers are mentioned on the next page.
Source: RHB Research - 11 Aug 2022
