• PropNex’s 1H19 net profit came in below our forecasts. Private resale volumes are expected to remain subdued as owners postpone their decisions to sell. New sales are expected to be supported by the strong pipeline of 45 projects (17,000 units) launch-ready in 2019-20.
• Interim dividend of 1.25 S cents (81% payout) was declared.
• In view of weaker transaction volumes, downgrade to HOLD with a lower target price of S$0.50 (previously S$0.60).
• Entry price: S$0.45.

1q19 Results

Results below expectations.

• PROPNEX LIMITED (SGX:OYY) reported 2Q19 net profit of S$3.7m (-11.9% y-o-y), bringing 1H19 net profit to 32% of our full-year forecast. 2Q19 revenue declined to S$92.1m (-24.3% y-o-y) due to lower commission income from agency services (-25.5% y-o-y or S$24.1m) and project marketing services (-22% y-o-y or S$5.6m).
• Agency services saw lower commissions due to the high base in 2Q18 (strong en bloc activities before the cooling measures contributed to strong resale activities in 1H18). Project marketing commissions declined as a significant number of OTPs were not completed as at 30 Jun 19.

Stock Impact

Widest agent network to see further growth amid industry consolidation.

• As at 13 Aug 19, PropNex maintained its position as the largest listed real estate agency with 8,049 sales persons. Compared to 1 Jan 19, PropNex has grown its sales force by 8.8% (or 649 sales persons), which can be attributed to strong pull-factors, like its top-notch training, development programmes and strong collaboration culture.
• The group also launched the PropNex Personal Assistant (PA) mobile application (which includes features like auto posting of listings, Open House, Grab Tagger), which can help its agents stay ahead of competition in making clients' real estate experience seamless and efficient.

Market leadership in project launches (47.7% of units sold in 2Q19).

• PropNex closed the highest number of units against other joint marketing agencies for almost all of the top 10 best-selling projects in 2Q19 (ie over 90% of the time). However, transactions at initial launch are likely to be recognised only from the following quarters (as revenue recognition takes place a few months after OTP is issued, in addition to time-lag to process various sales related documents).

Valuation service making headway.

• The newly set up Valuation department is part of the group's strategy to widen its real estate consultancy service offerings. In May, the group appointed Mr Joseph Gan as Director, who will be in charge of the team that provides valuation business services to clients, including banks, financial institutions, statutory boards, lawyers as well as private customers.
• PropNex has also been appointed by a few banks, including OCBC and Maybank, and is currently in active discussions with other financial institutions to be included on their panels.

New sales and HDB resale expected to remain resilient in 2H19.

• Amid a strong line-up of 45 launch-ready projects (with 17,000 units) in 2019-20, management expects new-sales momentum to stay resilient. It also plans to conduct consumer seminars (usually conducted by Mohamed Ismail and Kelvin Fong) to capitalise on the opportunities.
• On public housing, management noted that HDB resale is showing continued demand and price stabilisation.

Private resale volumes to remain relatively subdued.

• Private resale volumes declined 51% y-o-y to 4,167 units sold in 1H19, based on our download on 12 Aug 19. Management noted that the private resale market is still feeling the effects of the cooling measures and recent economic uncertainties. As a result, owners are postponing the decision to sell their properties.
• Interim dividend of 1.25 S cents declared, which represents a payout of 81.1% of 1H19 net profit.

Earnings Revision / Risk

• Cut our net profit estimates by -14% to -26% for 2019-21 as we factor in a steeper decline in resale volumes (as sellers hold off the decision to sell amid the uncertain economic climate). Additionally, we deferred new sales volumes (and their recognition) from 2019-20 into future years.

Valuation / Recommendation

Downgrade to HOLD with a lower target price of S$0.50 (previously S$0.60).

• Our target price is now based on PE valuation methodology (instead of blended DCF and PE), as a longer trading band history (and peer’s) is now available. The shift in methodology is also to reflect market volatility from global macroeconomic and geopolitical risks, as well as policy changes.

Our target price is now pegged to 12x 2020F PE.

• We believe PropNex’s premium over APAC Realty and its own historical PE (11x) is justified due to its wider outreach (17% larger agent network), and ownership of its proprietary brand (vs APAC Realty (SGX:CLN) which has the master franchisee for the ERA brand under APAC Realty).
• PropNex is also better positioned as the “preferred suitor” amid industry consolidation due to its stronger reputation, training, and more attractive commission structure for agents and team leaders.

Share Price Catalyst

• Positive newsflow on new launches and take-ups.

Source: UOB Kay Hian Research - 16 Aug 2019