• Maintain BUY with a new SGD0.60 Target Price from SGD0.65, 17% upside plus 5% yield.
• APAC REALTY LIMITED (SGX:CLN)'s 3Q19 and 9M19 earnings were below expectations, dragged by private resale volumes and higher marketing expenses. While overall market transaction activities are showing signs of a healthy 3Q pick-up, private resale activity remains slow.
• We are also slightly concerned over ERA’s slight market share decline. In the medium term, overseas market contributions should help buffer some of the volatility in the local market.
• We keep our call on a rebound in market sentiment and yield (c.5%).

Pick-up in New Sales Volumes With a Healthy Launch Pipeline

• Sales volume in new launches continued to show a pick-up, with YTD (9M19) transactions up 7% y-o-y to 7,469 units, mainly due to increased new supply from higher project launches. Management noted that while volumes are recovering, the market remains two-tiered, with selective projects seeing strong buying demand compared to others.
• While private resale demand remains weak (- 40% y-o-y YTD), there has been some improvement q-o-q.
• Housing & Development Board (HDB) unit resale and rental markets remain relatively steady on a y-o-y basis. The uptick in volume is not fully reflected in 3Q19 numbers due to lag effect (2-6 months for sale completion and earnings recognition), with better 4Q19 and 2020 results expected.

Market Share Weakened From Competition

• ERA Realty Network’s (ERA) overall market share in terms of transaction value for 3Q19 and 9M19 dipped to 31.9% and 31.7% (FY18: 36.4%), mainly due to lower market share in new launches. We believe this is due to increased competition and the appointment of more agencies by developers amidst challenging market conditions.
• On the positive side, ERA’s agent count in Singapore improved 8% YTD to 7,034 agents as of 1 Nov 2019, which should help in gaining market share.

Overseas Markets and Retail Asset to Contribute Positively in 2020

• Management noted that the ERA APAC Centre, which has been undergoing renovations this year, has achieved 100% committed occupancy at higher rents compared to expiring rents. Overall, it expects to generate a slight operating profit from the asset in FY20 compared to operational loss this year.
• With the acquisition of ERA Indonesia and ERA Thailand franchises, management has also been focusing on penetrating the lucrative new launch segment in these markets. Contributions from these markets are yet to kick in, with management guiding positive bottomline contributions in 2020.
• Looking ahead, APAC Realty plans to deepen its regional presence by potentially acquiring its franchisees.

Earnings Revisions

• We have lowered our FY19-21F net profits by 13-14% to reflect lower market share assumptions and higher marketing expenses.
• We have assumed a 60% dividend payout ratio.

Source: RHB Invest Research - 14 Nov 2019