• PropNex's 3Q19 results came in better than expectations although 9M19 net profit fell marginally short at 70% of our full-year forecast.
• We see a back-end loaded 4Q19 (with higher OTP completions). Private new sales will see earnings visibility from its unsold inventory of > 36,000 units, while HDB resale will also see catalyst from the Enhanced CPF Housing Grant. Management also suggested the market has found footing, evidenced by its stronger 3Q19 top-line.
• Maintain BUY and raise target to S$0.62 (from S$0.56).

3q19 Results

3Q19 results came in better than expectations.

• PROPNEX (SGX:OYY) reported 3Q19 net profit of S$6.1m (-15.2% y-o-y), bringing 9M19 net profit to 70% of our full-year forecast. Although 9M19 net profit came in marginally short of our forecast, we expect a back-end loaded 4Q19.

3Q19 revenue increased to S$122.5m (+33% q-o-q, -1.3% y-o-y),

• Rebounding to pre-cooling measures’ performance. The y-o-y decline was mainly due to decrease in commissions from agency services (-9.4% y-o-y to S$7.8m), offset by increased project marketing services (+15.9% y-o-y to S$6.2m).
• Agency services saw lower commissions due to the higher base in 2Q18 (strong enbloc activities before the cooling measures contributed to strong resale activities in 2018). Project marketing commissions increased as a significant number of Option to Purchase (OTPs) were completed during the quarter.

A pre-cursor to back-end loaded 4Q19.

• Management noted that most of its brokerage sales have at least one-quarter time-lag (with exception of the rental segment). The Jul 18 cooling measures resulted in an immediately lower (kneejerk reaction) in 4Q18. Both 1Q19 and 2Q19 were similarly subdued (vs same quarters in 2018). Only in 3Q19 that we saw top-line of S$122.5m (-1.3% y-o-y) on a par with 2018. They explained that most developers allow OTPs to go unexercised for as long as 6-9 months before the forfeiture of the 1.25% deposit. The snowballing effect thus resulted in a stronger 3Q19. Management sees this as the market finding a firmer footing.

Market leader in project launches; riding on the strong recovery in primary private market.

• In 3Q19, PropNex closed the highest number of units among joint marketing agencies for most of the new projects that were appointed by developers in Jul-Sep 19. However, transactions at initial launches are likely to be recognised only in the following quarters (as revenue recognition takes place a few months after the OTP is issued, in addition to time-lag to process sales related documents).

Management noted that buying interest continue to be positive

• as buyers become more responsive to new launches. PropNex cited Avenue South Residence (a new launch in Sep 19), which sold over 90% of the 300 units at its first launch weekend. Private new home sales in Sep 19 have crossed the 1,000 units mark for the third consecutive month in 2019 due to the increased number of new project launches in 9M19.

Strong earnings visibility from unsold pipeline ( > 36,000 units at end-3Q19).

• For 9M19, PropNex has been involved in 38 projects with a total inventory of 11,611 units (vs 30 projects with 12,722 units in 2018). For 2020, PropNex has been appointed to at least 44 projects (with over 13,882 units).
• Analysis suggests that if current unsold inventories (totalling S$55b-56b in GDV) are cleared within a four-year time frame – with PropNex maintaining its market share, top-line contribution from project marketing could come in at around S$200m per year.

Deepening its regional footprint with a 20% stake in PropNex Malaysia's enlarged share capital.

• PropNex Malaysia has grown to having close to 500 salespersons (from 60 at its opening in Mar 18). The group also opened its third office in Johor Bahru, Malaysia (with plans underway for its fourth office by 1H20).
• Management sees the potential in Malaysia’s real estate market, especially with an increase in number of expatriates and number of new projects and developments lined up. Malaysia will also be lowering its minimum price in 2020 for foreigners buying high-rise properties in urban areas to RM600,000 per unit (S$197,000) from the current RM1m (S$328,000).

Outlook: Resilient sales momentum and demand.

• Management noted that 3Q sales performance tends to be better, largely due to festivities at the beginning of the year, and sales momentum picking up thereafter. They expect sales momentum to continue for remainder of the year, led by the line-up of new launches. To capitalise on this, the group will continue to conduct consumer seminars (usually led by Mohamed Ismail and Kelvin Fong).
• On the HDB resale front, management expects more applications by first-time home buyers, backed by the recent introduction of Enhanced CPF Housing Grant with broader guidelines in Sep 19 (which will increase affordability for these applicants). They also expect the HDB resale market to reflect continuous demand and stable prices.

Earnings Revision / Risk

• We raise our 2019-21 net profit forecasts by 3-11%, factoring in higher contributions across private new sales and HDB resale, as well as a smaller decline in private resale in 2019).

Valuation / Recommendation

• Maintain BUY and raise target price to S$0.62 (from S$0.56), based on 12x 2020F PE, with reference to its closest comparable, APAC Realty (SGX:CLN) (11x) which is also pre-dominantly 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 - 15 Nov 2019