• Maintaining NEUTRAL with a lower TP of SGD0.60 from SGD0.75, 6% upside. The recent imposition of additional cooling measures and a sharp rising interest rates environment have dampened the outlook of the Singapore real estate sector. As a result, transaction volumes are expected to further slowdown, particularly in the resale market. This should impact earnings which we expect to decline 11% in FY23. Company’s net cash position and a decent yield of c.8% offer downside support.

• Revising lower our FY23-24F net profits by c.15% factoring in a slower volume growth especially in the resale market segment which accounts for c.55% of APAC Realty’s total revenue. In the DCF model, factoring in current market conditions, we also raise our cost of equity assumption by 100bps, which results in a lower TP. New home sales for full year are likely to come-in at the lower end of our expectations of 8,000 - 9,000 units. Overall resale transactions for 2022 are expected to decline 15% to 20% with a sharp slowdown of resale transactions under the Housing & Development Board in 4Q. For 2023, we expect flattish new home sales and factored in a 10% decline in resale market transactions.

• Slowly building its regional presence. APAC announced the purchase of an additional 79.74% stake in ERA Indonesia (IPAC IJ, NR) from Realti Indo Mandiri for a consideration of IDR92bn (SGD8.5m) raising its total stake in the listed subsidiary to 85%. The purchase price of IDR122 per share is at c.2% discount to the latest closing price of IDR125. As there is a change of control arising from the transaction, APAC has launched a mandatory tender offer at the same price for the remaining 15% shares, which will close on 16 Nov and also stated its intention to keep the entity listed.

• ERA Indonesia holds the ERA country master franchise for Indonesia. As at 30 Sep 2022, it had 111 active member broker offices in the major cities of Indonesia with 4,478 agents. In FY21, ERA Indonesia’s net profit was IDR3.9bn (SGD0.36m), based on which the transaction implies a P/E of 30x which we believe is justifiable considering the massive untapped future growth potential. The overall earnings contribution, assuming an 85% stake, is still very small at c.1% of total. The transaction will be fully funded from internal cash. Besides Indonesia, APAC has also been building its presence in Vietnam and Thailand markets with a view on long-term growth.

• 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 apply a 2% discount to our DCF-derived intrinsic value.

• Risks: Loss of market share and margin reduction from rising competition represent downside risks. The opposites are upside risks.

Source: RHB Research - 18 Oct 2022