• The more than 3-fold spike in 4Q19 net profit beat our earnings forecast. Revenue from new launches was far better than expected.
• Revenue surged on the back of the strong recovery in new project launches (+244% YoY) and stability in the resale market (+15% YoY).
• PropNex maintained full-year dividend at 3.5 cents, a dividend yield of 6.4%.
• We maintain our BUY recommendation. Our target price is raised to S$0.70 (previously (S$0.59). FY20e will be a year of growth, all three key business segments are recovering – new launches, HDB and private resale. PropNex stands out for its significant market share in Singapore (48% new launches), impressive unlevered ROE (28%), net cash balance sheet of S$82mn and attractive dividend yield.

The Positives

+ Robust share of new launches. Commission revenue from new launches (or project marketing) rose almost 2.5x to S$55.4mn. Apart from the overall improvement in sales, PropNex market share of new launches rose to 48% in 2019 (FY18: 42.4%, 3Q19: 46.1%). In 2019, PropNex was involved in 47 projects (FY18: 30).

+ Private resale market stabilised. Even the resale market has started to recover for PropNex. There was a 15% YoY increase in revenues. Revenues on a QoQ basis was flat. This segment saw PropNex enjoy the largest rise in market share from 34.2% in 2018 to 45% in 2019.

The Negative

– Dividend below our forecast. DPS was marginally below our forecast of 3.7 cents. There is no formal policy but the company looks forward to paying at least 50% of earning. The payout this year is 65%. The business is highly cash generative and the company aims to pay consistent and attractive dividends. PropNex generated free cash flow of S$27mn in FY19 (FY18: S$21mn) against dividends payable of S$14mn.

Outlook

We expect all three core business segments to enjoy growth in FY20e:

1. New launches: There are 38 new launches ready for FY20. In addition, PropNex is still marketing 104 existing projects. A reflection of the improved sentiment was the 70% take-up rate of The M project by Wing Tai over a weekend. There is demand if the project is appropriately priced and well designed with a good location.
2. Private resale: Cooling measures in July 2018 resulted in a buyers’ market. Demand has started to recover as the discount between resale and private begin to widen. Sidelined buyers will look to narrow this discount. Private resale transaction for the industry was between 13,000 to 14,000 in 2017 and 2018. This collapsed to around 9,000 in 2019. The normalisation of transactions back to 10,000 per annum will be a growth impetus for FY20e.
3. HDB resale: The enhanced CPF grant and higher-income ceiling offered to HDB resale buyers in September 2019 helped to pad transactions. In 4Q19, HDB resale transaction rose 12.5% YoY.

The rise in market share for PropNex was due to multiple initiatives, including intense training, improving the mindset of agents, deeper analysis of projects and better script and sales materials to agents to understand the projects and opportunities available from new launches or new pricing from developers.

Maintain BUY with a higher target price of S$0.70 (previously S$0.59)

Our target price is raised on the back of the 33% increase in our FY20e earnings forecast.

Source: Phillip Capital Research - 2 Mar 2020