• PropNex's 3Q19 PATMI of S$6.1m was slightly above our estimate due to a 15.9% y-o-y improvement in project marketing revenue.
• PropNex took a 20% stake in PRSB for RM1.1m and is positive on Malaysia due to the large number of projects and easing regulations.
• Maintain ADD. Our Target Price rises to S$0.68 as we include contribution from Malaysia, lower our risk-free rate and roll over our valuation to FY20F.

3Q/9M19 Results Slightly Above Expectations

• PROPNEX (SGX:OYY)'s 3Q19 PATMI decreased 15.2% y-o-y of S$6.1m due to a 9.4% decline in revenue from agency services but was offset by a 15.9% improvement in the project marketing segment. The larger proportion of revenue from project marketing in 3Q19 led to stronger gross margins of 10.8% vs 10.0% for 1H19.
• There was a 30.9% y-o-y increase in staff cost due to the accrual of bonuses on a quarterly basis instead of at year-end and salary increments.
• 9M19 PATMI of S$6.1m formed 82% of our FY19 forecast due to strong 3Q performance offset by weaker 1H19 results.

Primary Sales Building Momentum as Secondary Sales Lag

• In 3Q19, URA recorded an average of 1,200 units transacted per month for primary private home sales; this is 80% above the average of 650 units/mth recorded for 1H19. We think this was encouraging especially for Aug, which coincided with the Hungry Ghost Festival, which historically had a low number of transactions. We maintain our FY19F primary private transaction volume forecast of 9,000 and think 4Q19 revenue could be better as a result of lagged recognition.
• HDB sales rose 2.7% q-o-q to 2,482 units and private resales slipped 0.7% q-o-q to 6,264 units in 3Q19. Hence, we think that the resultant 4Q19 revenue recognised could be similar to 3Q19.

Making Its Move in Malaysia With 20% Stake

• In Nov 19, PropNex announced an investment in PropNex Realty Sdn Bhd (PRSB) by subscribing for 10,000 new shares representing 20% PRSB’s share capital for an aggregate cash consideration of RM1.1m. This investment is in line with its overseas expansion strategy of taking direct stakes in licensee companies after they have sufficiently scaled up.
• PropNex said PRSB started with 60 agents in Mar 18 and currently has nearly 500 agents and is profitable. PropNex is positive on the Malaysian real estate market due to the large number of new projects and the easing of regulations making it easier for foreign buyers by lowering the minimum price required from RM1m to RM600k.

Maintain ADD With a Higher Target Price of S$0.68

• We lift our FY19-21F EPS forecasts by 2.65-5.29% as we fine-tune our transaction volume assumptions, tweak our GP margin assumptions, add in the contribution from PRSB from FY20 onwards, lower our risk-free rate and roll over our valuations. Our Target Price rises to S$0.68 based on an average of 10x FY20F P/E and DCF valuation.
• Key catalysts for PropNex include a higher proportion of potential buyers exercising their options to purchase while downside risks include cooling measures from the government.

Source: CGS-CIMB Research - 14 Nov 2019