• PropNex is the largest real estate agency in Singapore, with a dominant share of 43.8% of the residential primary private market in 2017. With negatives from the recent cooling measures priced in, the stock now offers an attractive 12.3% FCF yield (sustaining a 5.5% dividend yield) for 2019.
• We believe it is a low-risk proxy to Singapore property and a future-proof business model (with strong agent retention). 
• Leveraging on its strong brand equity, the group has expanded regionally into Malaysia, Indonesia and Vietnam.

Largest Real Estate Agency in Singapore; Sees Regional Expansion and Growth of Consultancy Services

PropNex employed 7,512 agents as at 10 Sep 18 (~25% agent share) according to CEA.

PropNex, which stands for Property Network for Excellence, had a dominant share of 43.8% in the lucrative residential primary private market in 2017, and 45.8% of the stable HDB resale market in 2016, in terms of transaction value. The group has also expanded regionally via franchising/licensing agreements.

Low-risk Proxy to Singapore Property

• PropNex offers a more risk-mitigated (asset- light) approach to the Singapore property market, compared with developers that face huge capital outlays on land bidding and construction, development risks and holding costs (ie QC extension charges).
• The cooling measures (announced on 5 Jul 18) have constrained developers in terms of their new-launch pricing, consequently thinning their margins. However, their agency business has been particularly insulated due to higher commissions rate from developers (to incentivise agents to move inventories), a strong pipeline of mandates (20 projects) till end-19, and a still resilient resale market (across private and HDB properties) supported by en blocers’ replacement demand.

Future-proof Business Model (with Strong Agent Focus) and Owner-sponsored Structure

PropNex’s dual-career path, training culture and marketing platform, as well as competitive compensation, have led to higher retention and growth of its agent network.

In our view, PropNex would be the preferred “suitor” among smaller agencies as the industry consolidates.

Key management Mohamed Ismail (Executive Chairman and CEO), Alan Lim (Executive Director) and Kelvin Fong (Executive Director) own more than 70% of the company, ensuring strong management interest alignment.

Inititate Coverage With a BUY and Target Price of S$0.65

Inititate coverage with a BUY and target price of S$0.65, based on an equal balance of DCF (9.75% required return, 0% terminal growth) and 2019F PE of 10x with reference to its closest comparable, APAC Realty (predominantly Singapore-focused, and similar in terms of commission structure and operating segments).

Our forecasts conservatively assumed a 10% y-o-y decline in non-landed new sales volume for 2019 (ie which works to total market transaction volume of 9,108 units, inline with the 9,794 units sold 12 months after TDSR implementation in Jun 2013), as well as 40% marketshare by PropNex.

If non-landed new sales volume for 2019 stays flat, our target price will work out to S$0.68.

Source: UOB Kay Hian Research - 11 Sep 2018