• 3Q19 net profit was below our estimates.
• Apart from the weaker transaction volumes, net profit in FY19 has been hit negatively by agent license subsidy fee and losses at the newly acquired property. The combined financial impact is negative S$2mn.
• We lower our recommendation from BUY to ACCUMULATE. Our target price is reduced to S$0.55 (previously S$0.68). We cut our FY19e and FY20e net profit forecast by 15% and 13% respectively. We expect a recovery in 2020 as property transactions build up momentum, there is also a robust pipeline of new projects.

The Positives

+ Commission from rental has been resilient. Revenue from rental transactions has been resilient.

+ Agency force still expanding steadily. The agency force is now 7,034, an 8% rise for this year and almost 20% improvement from January 2018. Smaller agencies do not get access to new project launches. The almost 40% collapse in secondary transaction will encourage agents to shift to larger agencies.

The Negatives

– Operating expenses higher than expected. Expenses were hurt by two major items – annual agency renewal fee (S$250 per agent) to be borne by the company and losses from the newly acquired ERA APAC Centre property. Both items cost the company almost S$2mn. The APAC Centre should turnaround as the property is now fully occupied and is making better rental rates.  

– New homes sales weaker than expected. Revenue from new home sales has been weaker than some peers. The extension of options may modestly overstate actual number of property transactions. Some investors may be willing to risk 1.25% (or 25% of 5% booking fee) of property value to buy time if the property market recovers.

Outlook

It will be a better year in 2020. Transaction volumes are recovering post cooling measures and there is a large pipeline of new projects. In 1H20, there will be at least 15 new projects or 5,181 units to be marketed.

Downgrade to ACCUMULATE with a lower target price of S$0.55 (prev. S$0.58)

Our lower target price is in-line with the cut in our earnings estimate in FY19e/FY20e.

Source: Phillip Capital Research - 18 Nov 2019