• Upgrade to BUY from Neutral, unchanged SGD0.75 TP implies 25% upside. APAC Realty’s 1Q22 net profit exceeded our expectations. The stock has fallen 17% YTD, which we believe is partly due to concerns over the lowball mandatory offer triggered by Northstar selling its stake in APAC to Morgan Stanley Private Equity (MSPE). Despite an uncertain macroeconomic environment, we expect Singapore’s property market to remain resilient. We see value emerging at APAC – the stock is trading at 9x FY22F P/E, with a handsome c.8% yield offering downside support.

• 1Q21 net profit grew 20% YoY to SGD9m, driven by strong contributions from the new home sales segment, which clocked revenue growth of 42% YoY. This segment’s strong numbers were mainly due to the robust transaction activity in 4Q21 before the implementation of cooling measures in mid-Dec 2021 – there is a time lag of 2-6 months in earnings recognition for this segment. New home sales have since plunged since the start of the year (YTD, 40% below last year’s numbers) on the back of limited supply. This, in turn, should result in a 30-40% plunge in 2Q22 net profit. In 1Q, APAC maintained its overall 37.9% market share (as a percentage of sales) of total Singapore residential property transactions.

• MSPE offer closes with a 65% effective stake. MSPE, in April, announced its acquisition of a c.60% stake of APAC from Northstar, at SGD0.57/share. Northstar has been a major shareholder since 2013. The offer, in our view, was an opportunistic one that came on a market slowdown posed by Dec 2021’s cooling measures and limited new home supply. The offer closed on 10 Jun, with MSPE receiving 64.8% acceptance. We remain positive on APAC’s mid- to long-term outlook, on the back of its leading agency position in the stable Singapore property market and its master franchise rights for 17 countries in the Asia-Pacific. The entry of MSPE, one of the largest investment managers globally (AUM of USD1.6trn as at end- Dec 2021) is also likely to bring in more M&A opportunities for the company, and will help deepen its Asia-Pacific expansion plans in our view.

• Higher government land sales and pick-up in en bloc market positive for 2023-2024F transaction outlook. The Singapore Government is raising the confirmed list of the supply of residential properties for 2H22 by 26% HoH, amid robust demand and sharply declining inventory levels. En bloc market transactions are also showing nascent pick-up signs, with the recent sale of Lakeside apartments at a 14% premium over the reserve price, and an increase in the pipeline of collective sales.

• We lift FY22-23F earnings by 2% by tweaking our sales volume assumptions. APAC’s ESG score of 2.9 out of 4.0 (based on our proprietary in-house methodology) is a notch below our country median, so we have apply a 2% discount to our DCF-based intrinsic value to derive our TP.

Source: RHB Research - 23 Jun 2022