• PROPNEX LIMITED (SGX:OYY) reported a lower-than-expected net profit from a decrease in project marketing contributions (as a result of non-completed OTPs and time lag in sale recognitions). Management also expects contributions from private residential (new and resale) to regain momentum in 2H19, supported by deferred launches and displaced en-bloc owners (receiving their sale proceeds).
• Maintain BUY with a lower target price of S$0.60 (previously S$0.66).

Propnex 1q19 Results

Results slightly below expectations.

• PROPNEX LIMITED (SGX:OYY) reported a 1Q19 net profit of S$2.0m (- 67.6% y-o-y), bringing 2019 net profit to 9.5% of our full-year forecast. 1Q19 revenue declined 27.8% y-o-y to S$74.2m, due to the decrease in commission income from project marketing services which declined by 60.6% y-o-y (or S$22.3m).
• Project marketing contributions declined by 60.6% y-o-y, as a significant number of option-to-purchase (OTPs) have not been completed as at 31 Mar 19. Therefore, transactions at the initial launch of recent popular projects, such as The Treasure@Tampines and The Florence Residences (both launched in Mar 19) are likely to be recognised only in the following quarters.

Widest agent network to see further growth, amid industry consolidation.

• As at 13 May 19, PropNex maintained its position as the largest listed real estate agency with 7,773 sales persons. From 1 Jan 19, PropNex has grown its sales force by 5.0% (or by 373 sales persons), which can attributed to the group's top-notch training, development programmes, and strong culture of sharing and collaboration.

Market leader in new project launches.

• PropNex was involved in 14 new projects since Jan 19 (of which 5 were takeover projects). Of these, PropNex led in terms of the number of units sold in 7 of the 9 new launches, outperforming its peers.
• PropNex has also been appointed for 46 projects to-date (out of an anticipated line-up of another 66 projects totalling more than 20,000 units). To capitalise on the numerous project launches, PropNex has made plans to increase their frequency of consumer seminars (ie often conducted by executive directors (ED), Mohamed Ismail and Kelvin Fong) to articulate opportunities to potential buyers.

Private residential to see a better 2H19.

• Management noted that the first quarter traditionally sees muted transaction volumes (ie due to the higher number of festive holidays), and developers also tend to delay launching projects at the start of the year. They also see new projects, which are strategically positioned and sensitively priced, as a pull-factor for upgraders and investors, a trend that could be sustained for the rest of 2019.
• Private resale residential is also reeling in from the cooling measures, as homebuyers potentially hold off their decisions of buying. For 1Q19, URA private resale transactions declined by 5.7% q-o-q to 1,858 transactions. However, management expects resale to pick up momentum in 2H19, as en-bloc owners are receiving their sale proceeds, and will be looking for replacement homes that allow for immediate occupation.
• Management noted that although private resale (27%) and new project launches (20%) make up 47% of total revenue, they expect these two segments to regain their weightage to levels seen in 2018 (eg 57%).

Public housing continues to be resilient.

• The HDB resale market is showing continuous demand and price stabilization, which can be attributed to the 30,000 HDB flats (comprising HDB and DBSS flats) reaching MOP this year, coupled with the lower number of BTO flats offered this year at 15,000 units.

Pioneering the HDB Auction.

• PropNex is providing HDB owners an alternative option to market their housing units through its new service, HDB Auction. Interested parties can offer and sell to the highest bidder, subject to the reserve price being met. There are over 1m HDB owners in Singapore with 22,000 and 23,000 HDB resale transactions respectively in 2017 and 2018 respectively.
• HDB Auction provides an additional platform for public housing sellers to secure the right buyers. The platform is particularly useful for divorce cases and property under estate.

New Departments: Corporate Leasing and Valuation to drive revenue growth.

• Corporate Leasing is being led by Mr Norris Low (ie joined in Jan 19), who brings over 20 years of experience in the real estate industry, and will lead the team in managing the needs of corporate clients, as well as owners of MNCs and High Net Worth Individuals (HNWI).
• The Valuation department is led by Mr Joseph Gan (ie joined in May 19), and will provide valuation business services to clients including banks, financial institutions, statutory boards, lawyers as well as private customers.

Earnings Revision / Risk

• Cut our net profit estimates by 11% to 15% for 2019-21F to reflect a shift in gross profit mix towards project marketing (ie corresponding outflow via minority interest attributable to JLL’s 28.17% stake), as well as higher staff cost assumptions.

Valuation / Recommendation

• Maintain BUY with a lower target price of S$0.60 (previously S$0.66), based on DCF (9.75% required return, 0% terminal growth) and 2019F PE of 10x with reference to its closest comparable, APAC REALTY LIMITED (SGX:CLN) (predominantly Singapore-focused, and similar in terms of commission structure and operating segments).

Share Price Catalyst

• Positive newsflow on new launches and take-ups.

Source: UOB Kay Hian Research - 16 May 2019