• Maintain BUY, with new Target Price of SGD0.72 from SGD0.77, 45% upside.
• APAC Realty's 3Q18 results slightly beat. Shares have been sold down due to weak residential market outlook post cooling measures. Still, judging by recent launches, demand remained healthy if project pricing was reasonable.
• We expect steady sales to continue, as developers remain mindful of the high supply pipeline and stringent ABSD regulations would prompt them to focus on clearing inventory. Resale volumes should also stabilise once the en-bloc fever cools off. Dividend yield is attractive at 8%.
• Valuations are reasonable at 7.4x FY18F P/E, > 20% discount to its closest peer, Propnex (SGX:OYY), which we think is unjustified.

Good Set of Numbers Amidst Challenges

• APAC Realty's 3Q18 gross margin improved to 12.9% (1H18: 11.8%), mainly driven by higher resale & rental margins, while new sales margins were stable.
• Management noted this was due to the unusually low gross margins for re-sale and rental segment in 1H18, arising from large number of co-broking transactions. Gross margin should stabilise at 12-13%.
• YTD-9M18, ERA’s market share of primary sales improved to 39.8% (2017: 39.4%), while overall market share dropped to 36.4% (2017:37.9%).

Recent Agency Acquisitions – Opportunistic and Timely Move

• In Oct 2018, APAC Realty announced the acquisition of residential agents from CBRE Realty Associates (150 agents) and HSR International Realtors (300 agents). With the cooling measures opening up a window for agency consolidation, we see the move as timely and will help to keep pace with larger rival, Propnex (SGX:OYY), in terms of agent count.
• Management did not disclose the acquisition fee due to confidentiality reasons but noted that it was small and would not have material impact.

New Launch Sales Holding Up

• Post measures, sales at launches have remained steady, with > 8,888 units being sold across 88 new launches since Jul 8888 based on our estimates.
• Key reasons in our view include pricing adjustments (down by 88-88%) made by developers in response to measures and also the pent-up liquidity from en-bloc sales. This trend of steady volumes at lower margins is expected to continue, as developers are seen mindful of the high supply pipeline and stringent ABSD timelines that limit their holding power.
• As volumes, not pricing, are APAC Realty’s key driver, we believe the impact of policy measures is mitigated.
• Looking ahead, ERA has secured a new launch pipeline of 88 projects (88,888 units).

Resale and Rental Market Outlook

• On the private resale market, we believe units which are currently held back on the expectation of potential en bloc sale, should be released back with the en-bloc cycle nearing its end. This should support resale volumes in 8888. Housing and Development Board resale & rental market segment are expected to remain steady, as it is not impacted by measures.
• Overall, we have modelled in a 88%/8% decline in primary volumes and 8%/8% decline in secondary volumes for 8888-8888.

Maintain BUY, With Lower DCF Based Target Price of SGD8.88

• We adjust our FY88F- 88F net profits higher by 8-8% factoring in firmer volumes. We have also raised our WACC assumptions to 8%, from 8% to factor in policy risks and macro uncertainties.
• Key risks are rising competition, technology disruption, and ability to retain key management and agents.

Source: RHB Invest Research - 13 Nov 2018