• Stay NEUTRAL and SGD0.60 TP, 2% downside. APAC Realty’s FY22 net profit exceeded expectations on the back of robust market activity last year, but it is expected to soften in 2023 as rising interest rates and cooling measures take a bite. The group has been diversifying its income stream by expanding overseas and adding more business segments, eyeing for the longer term, which resulted in higher upfront costs. Share price remains supported by c.7% yields and its net cash position.

• FY23 earnings expected to decline 21% YoY, as we forecast residential transaction volumes to decline on the back of a more cautious buying sentiment. This comes after a 25% YoY decline in profits in FY22, which was above our expectations (110% of our forecast), as market activity remained robust. FY22 earnings also includes a one-off charge of SGD3.1m, a fair value loss on a convertible loan for its listed Indonesian entity in which it acquired a c.85% stake. The group declared a final dividend of 2.75 cents, taking full-year dividend to 6.25 cents, which translates into a c.75% pay-out ratio and a 10% yield.

• Primary volumes to remain steady, resale volumes to slow down. For 2022, new home sales (excluding executive condominiums) fell 43% YoY at 7,384 units, with a slowdown more pronounced in 2H. As there is a lag effect in earnings (typically 3-6 months), this will probably have an impact on APAC’s 1Q23 net profit. Overall for 2023, we expect new sales to be slightly higher (8,000-9,000 range), mainly driven by significantly increased new launches. Resale volumes though are expected to take a hit (5-20% lower) on pricing expectation mismatch, and rising interest rates.

• Increasing agent count and maintaining market share a key priority. In 2022, ERA Realty Network (ERA) maintained its second-largest position in Singapore’s residential market transactions with a market share of 40.6% (FY21: 40.3%). Its Singapore agent count increased 5% last year to 8,527, with a target to reach 10,000 agents over the next two years. We believe the competitive real estate agency landscape could bring some M&A opportunities. ERA has been investing in its digitalisation strategy to better equip its agents and attract young talent in the industry. Another area of growth has been its capital markets & investment sales business unit, which has so far recorded SGD43m in transaction value since inception in early FY22. Its overseas operations have turned the corner in FY22, but meaningful contributions are likely only after 3-5 years.

• We tweak higher FY23-24F earnings by 2% and 3% adjusting volume assumptions. Our ESG score of 2.9 out of 4.0 (based on our proprietary in- house methodology) is one notch below our country median score. Hence, we apply a 2% discount to our DCF model to derive the TP.

Source: RHB Research - 6 Mar 2023