• 3Q19 results were in-line with our estimates. With the recovery in property transactions, we expect earnings to have bottomed out.
• New launches have been driving revenue growth (+16% YoY) whilst private resale remains very weak (-30% YoY).
• We expect PropNex to pay attractive dividends (yield of ~7%) in view of the low capital intensity of the business and cash hoard of S$74mn in the balance sheet.
• Our BUY recommendation and target price of S$0.59 is maintained. We favour PropNex for their impressive market share (46% in new launches), attractive valuation, high unleveraged ROE (20%), healthy balance sheet and recovering transaction volumes in the Singapore residential market.

The Positives

+ Revenue in recovery mode. After the 30% YoY drop in revenue in the prior quarter, revenue has started to stabilise for PropNex. Property transactions have recovered, led by new property sales. Market share for new launches stood at 46.1% (2018: 42.4%).

+ Building a foundation in Malaysia. At inception in March last year, the number of agents in Malaysia was 60. Today, the agency force has grown to 500. PropNex has acquired a 20% stake in the Malaysia entity to enjoy a share of future profitability in addition to the current royalty stream.

The Negatives

– Private resale revenue was the weak link. No surprise that resale revenue is the softest part of the business. Recovery in this segment will be slower, unlike new launches where developers do respond to weak sales through higher commissions or better pricing. Nevertheless, PropNex still managed to increase their market share in private resale transaction to 40.7% from 34.2% as at end 2018.

– Staff cost jumped 31% due to a change in accounting policy. Bonus for this year is accrued every quarter, in contrast to full recognition in the final quarter of last year.

Outlook

Outlook for next year will be firmer. Revenue from the higher number of transactions in 3Q19 will largely be recognized in 1H20e. In addition, there is a pipeline of around 38k unsold units that is available for Propnex to market in the next few years. In 2020, there will be 44 new launches (or 13.8k units).  The resale market will remain subdued until sentiment improves. No urgency by buyers or sellers to transact.

Maintain BUY with an unchanged target price of S$0.59

Our recommendation, target price and earnings forecast are maintained.

Source: Phillip Capital Research - 18 Nov 2019