• 2Q19 results was a significant miss. We are lowering FY19e earnings by 37%.
• Transaction volumes collapsed, especially in the resale market where volumes fell a massive 49% in 2Q19. This quarter was challenging compared to the record earnings in 2018.
• We maintain our BUY recommendation. Our target price is lowered to S$0.58 (previously S$0.65). We cut our FY19e and FY20e net profit forecast by 37% and 28% respectively. Our transaction volume assumptions were too aggressive. We still favour real estate agencies for their impressive market shares and attractive business economics.

Results at a glance

The Positive

+ Making headway overseas. APAC is gaining momentum in securing marketing rights for more projects in Indonesia and Thailand. The contribution is still minimal as the company is investing in headcount and expanding the number of franchise agents.

The Negatives

– Transaction volumes collapsed. Revenues in new homes plunged 33% YoY due to lower volumes in the past two quarters. Resale revenues plummeted even more, by 40% YoY this quarter. Secondary market transaction industry-wide plunged 49% YoY in 2Q19. A huge gap exists between bid and offer prices in the resale market. For new projects, buyers for mass-market projects are the HDB upgraders. There is limited activity from the enbloc beneficiaries.

– New project also hurt by a marginal drop in market share plus slower recognition of revenue. Market share for new projects is 30%. A marginal dip of 31-32% in 2017/18. New project commission revenues are only recognized when billed to the developer. When sell-through rates of development projects are 20% and below, there is typically slower payments to the agencies. Another delay is the re-issuance of options to buyers.

Outlook

Sentiment in the property market is still weak. However, new project sales are beginning to recover, albeit at a gradual pace. APAC has secured marketing agents roles in 51 property projects this year or 19,145 units. There have been several successful project sales in June and July where revenues are typically recorded two quarters later.

Maintain BUY with a lower target price of S$0.58 (prev. S$0.65)

We slashed our FY19e and FY20e net profit forecast by 37% and 28% respectively.  It will be a challenging year in 2019 but we expect revenues to recover in the latter part of the year.

Source: Phillip Capital Research - 8 Aug 2019