$APAC Realty(CLN.SI) $PropNex(OYY.SI)

Summary
- There is currently a huge valuation gap/mispricing between Propnex and APAC.
- At $0.585, Propnex is trading at 13.3x FY17 P/E with a market cap of $216.5m.
- At $0.605, APAC is trading at 7.5x FY17 P/E with a market cap of $195.2m
- Propnex is trading at a 77% premium to APAC despite inferior fundamentals.
- APAC is trading at a 44% discount to Propnex despite superior fundamentals.
- The pair should trade at a closer valuation given no unique competitive advantages of either company.
- Either Propnex is overvalued or APAC is undervalued.
- Biased towards Pronex being overvalued.
- Catalysts will be 2Q & 3Q results, and end of Propnex’s moratorium in Jan 2019.

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22 likes
38 comments
MasterLeong

I believe market is pricing both correctly
Propnex ownes its own brand
Has a leaner model and better ROE
Thus propnex higher PE and apac realty lower PE is correct
Those who believe other wise should short propnex and long apac if u think eventually will normalize

kennychia

Reply to @HappilyRetired : Thanks for sharing, let's see how things play out over the next few months.

Have a great weekend :)
Cheers

  View More Replies
Opportunist

But Propnex gross profit margin seems higher. Which somehow explains why its trading many more X PE as compared to APAC.

jeremyowtaip

Reply to @KennyChia : I agree with Kenny's thinking. Due to unique characteristics of the consideration for assets for Propnex and APAC Realty such as the gross proceeds from IPO not added in for former and presence of sizeable intangible assets in goodwill for latter, I think it is not very fair to compare gross profitability. Instead gross and operating margins are possible measures. Return on equity (assuming both of them have similar financial leverage) and return on invested capital could also be used.

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wil168

do you have the number of new launches developers outsourced to Propnex versus Apac to get a feel of who is dominating the market for new launches.

TUBInvesting

Reply to @wil168 : Apac abt 20 if I am not wrong

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ThumbTackInvestor

Thanks for this, I liked the writeup... well, most of it, except the conclusions, cos I'm just newly vested with a tiny position (40,000 shares) in APAC at $0.6.

I'd point out that your table that shows a sharp drop in transactions the MONTH after the announcement of previous cooling measures actually supports RHB's assertion that overall, transactions are only expected to drop 10% (thereabouts)
In fact, in that same chart, the month following the sharp drop, shows a sharp rebound.
Full year wise, the drop in transactions isn't as bad as you projected.
1 of the main reasons for this that your article didn't mention, is that in the new launches, the developers have to offload their units within 5 years or face big fines. This 5 year period includes the time to construct, develop and launch and sell completely.
The fines are proportionate to the number of unsold units within the development, and getting fined for a single unit would easily wipe out the profits for another sold unit.... and more.
So developers are loathe to incur these fees, and the loophole of selling to related shell companies set up by parts of the management team has been closed with more disincentives
Hence, developers would be more inclined to either offer huge discounts for unsold units, and/or raise the commission payable to incentivize agents.
Think of it as such: the developers HAVE to move units. They simply have to. Holding on to any unit past the 5 yr mark (and again, mind u, the clock doesn't only start clicking after completion of construction...), is not a viable option.
Of all these units that the developers are going to launch....... someone has to move these units.
APAC dominates the new launches, I can't rem the exact figures right now, but they win even Propnex in the "new launches" section.
Since there's no cost to the agents if units are not moved... the developers are the ones who have a deadline and will cut prices to help move units.
Since most projects are launched early (before construction), APAC comes in right at the start of this chain of events.
1 other logical point: I think it is obvious that it is not the government's intention to crash the property market. They would want to cap prices from running away like what's happening in HK, and they would want to make sure owners are prudent and won't be wiped out when markets turn.
So I think the markets have over reacted here, as it often is the case when something as emotional as property dominates the media headlines.
If we have a 50% drop in transactions after this round of measures, and prices drop 20% from here, you can be sure that the gov would lift or lessen some of these measures.
(As per the previous episode of reducing the SSD's time period from 4 years to 3 years)

opy

like that apac looks pretty undervalued

kennychia

Reply to @opy : Relative to Propnex, yes it is.

HomeMaker

Not sure of their revenue stream, would think earnings being extremely volatile. Is any way these companies can address it

kennychia

Reply to @HomeMaker : Focus on growing abroad as well as providing property related services that are more recurring in nature.


Recommended & Related Posts

Expiry:
Target Price
$0.59
(+10.28%)
NOW:

$APAC Realty(CLN.SI)

Initiated a small long position @ 0.53

Share Price =0.53
Mkt Cap = 188.3m
Net Cash = 61.7m (1H18 numbers)
Debt = Zero (1H18 numbers)
EV = 126.6m (Mkt Cap - Net Cash + Debt) (1H18 numbers)
EBITDA = approx. $32.3m (excl. IPO expenses) (FY17)
FCF = 34.1m (34.6m - 0.5m) (FY17)
EPS = 0.0803 (FY17)
DPS = 0.0402 (assuming 50% payout ratio)
Net Cash Position = 32.8% of market cap

FY17 EV/EBITDA = 3.9x
FY17 P/FCF = 5.5x
Free Cash Flow Yield = 18.1%
FY17 P/E = 6.6x (0.53/0.0803)
FY17 P/E ex-cash = 4.4x (0.53/0.0803)
FY17 Dividend Yield = 7.6% (assuming 50% payout ratio)

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A Song of Fire & Ice – APAC Realty & Propnex
- Original Post from The Little Snowball



Source: The Business Times


Introduction


As an investor, you could have all the numbers and all the facts, be completely right in your investment thesis, and yet, still lose money. The property recovery story was perfect, the stars were all aligned, and yet, in less than 24 hours, whatever bullish investor sentiment waseviscerated. It was just last week where The Business Times published the article above, re-reading it now reminds me of the quote: “Man plans. God laughs”.


There is enough well-written coverage on the latest round of cooling measures so I will not be covering it in this article. What I will do, is to discuss the investment merits and valuations of APAC Realty and Propnex.


To recap:



APAC was listed in Sep 2017 at $0.66 per share with a market cap of $205.3m.



Propnex was listed in Jun 2018 at $0.65 per share with a market cap of $240.5m.


Summary



  • There is currently a huge valuation gap/mispricing between Propnex and APAC.

  • At $0.585, Propnex is trading at 13.3x FY17 P/E with a market cap of $216.5m.

  • At $0.605, APAC is trading at 7.5x FY17 P/E with a market cap of $195.2m

  • Propnex is trading at a 77% premium to APAC despite inferior fundamentals.

  • APAC is trading at a 44% discount to Propnex despitesuperior fundamentals.

  • The pair should trade at a closer valuation given no unique competitive advantages of either company.

  • Either Propnex is overvalued or APAC is undervalued.

  • Biased towards Pronex being overvalued.

  • Catalysts will be 2Q & 3Q results, and end of Propnex’s moratorium in Jan 2019.


Unbelievable Valuation Gap Bound to Narrow



The valuation gap between APAC and Propnex was narrowing the first few trading days post-Propnex’s IPO. Even during the day after the cooling measures, the valuation gap did not move much. The next week, however, the gap spiked to 78% and ended above 76% at last close (13 July 2018).Plausible reasons for the persistent mispricing could be due to share purchases by the stabilizing manager and insiders (discussed further below) of Propnex.


With reasons I will substantiate in the rest of the article, I posit that the valuation gap will narrow over time and that APAC should trade at a premium compared to Propnex.



Propnex’s Stabilising Manager Out Of Bullets



Source: SGX




Source: InvestingNote


In just two days, UOB Kay Hian, the stabilizing manager maxed out the total number of shares it can repurchase from the open market amidst the aggressive selling. On 9th July (2nd day), Propnex’s shares closed 14.6% higher. If you look at the total market trading volume of that day, 42% was attributed solely to UOB Kay Hian. If it were not for the stabilizing manager, shares of Propnex would certainly be trading at much lower levels.



Propnex’s Insiders Propping Up Share Price



Source: SGX


The day after the stabilizing manager ran out of bullets, the insiders joined the fray by buying up shares in the open market. In 4 trading days, they have since repurchased a total of 2.05m shares between $0.575-$0.590. I am not certain how long the insiders can/will continue doing so but I am certain they cannot do it forever.



Propnex’s Moratorium To End In Dec 2018



Source: InvestingNote


The price chart above belongs to APAC. One interesting point to note is that the end of APAC’s moratorium on 27 Mar more or less coincided with the beginning of its downtrend. Perhaps Propnex might experience similar price action when its moratorium ends on 1 Jan 2019. Then again, correlation does not mean causation.



Absolute Revenues & Net Profits – APAC beats Propnex



Based on the latest audited financial statements of APAC and Propnex, you can see that while Propnex is marketed as the “largest real estate agency in Singapore”, APAC delivered higher revenue and net profit.


Revenue stream diversity – APAC beats Propex



Source: Propnex Prospectus


Source: Propnex Prospectus Page 58



Source: APAC Annual Report 2017 Page 6


In the front coloured pages of Propnex’s prospectus, it showed that it has four core business segments namely: 1) Real Estate Brokerage, 2) Training, 3) Property Management, and 4) Real Estate Consultancy. However, if you turn to page 58 (non-coloured) of the same prospectus, you find that Real Estate Brokerage accounted for a whopping 99.1% of FY17 revenue. Training and Property Management accounted for only 0.3% and 0.6% respectively. No revenue was attributed to Real Estate Consultancy. Since when does a zero to sub-1% of contribution to revenue become recognized as a core business segment? The fact that Propnex showed glamour in the front pages of the prospectus but hid the specific figures 58 pages into the ponderous tome makes me feel uneasy.


APAC, on the other hand, provided a clear breakdown of its gross profits in its 2017 Annual Report on page 6. In FY17, 84.9% came from Brokerage while 15.1% came from Non-Brokerage.


While both Propnex and APAC are heavily reliant on brokerage as a revenue driver, it appears that the latter has a more diversified revenue stream compared to the former.


Geographical Presence – APAC beats Propnex



Source: Propnex Prospectus



Source: APAC Annual Report 2017


As at 6th June 2018, there are 7,248 Propnex agents in Singapore. As at 25th April 2018, there are 6,100 APAC agents in Singapore. While Propnex is the largest in Singapore by agent count, APAC beats Propnex when it comes to geographical presence.


While Propnex is still in discussion to expand to Vietnam, APAC had already done so last year and now has 308 agents there. Also, compare the numbers for Malaysia and Indonesia, APAC has more agents there as well. APAC also has agents in places Propnex has not even been/considered yet (Korea, Japan, Taiwan, Cambodia).


Propnex may be the largest real estate agency in Singapore with over 7,000 agents, APAC is the largest international real estate agency in the Asia-Pacific region with 17,500 agents.


Ratio Analysis – APAC beats Propnex





Source: Company Prospectus and Annual Report


The charts speak for themselves, in terms of gross profit margin, operating profit margin, net profit margin, APAC beatsPronex. This is despite the fact that APAC incurred a one-off IPO expense of $1.2m; if not, operating margin and net profit margin would be higher.


In terms of financial position, both companies are on par, net cash position is approximately 30% of their respective market caps. I have not factored in the yet-to-be-completed Toa Payoh property purchase for APAC.


No smoke without fire – Propnex & DWG in recent news for the wrong reasons



Source: The Straits Times



Source: The Straits Times



Source: The Straits Times



Source: The Business Times


Corporate governance is a crucial determinant of the long-term sustainability of any enterprise, the recent Midas saga is a great testament to that point. A simple google search on recent news related to Propnex and APAC would raise red flags on the corporate governance and business practices regarding the former. Hence, it seems like Propnex is more exposed to compliance and reputational risks which may translate to fines or loss in brokerage revenue, both of which would hurt valuations.


DBS downgrades APAC to fully valued, TP $0.66 (from $1.22, -46%)



Source: DBS Group Research


After the cooling measures were announced, DBS promptly downgraded APAC to fully valued from a buy, revising TP to $0.66 from $1.22 (-46%). One salient point in the report is how highly sensitive APAC’s revenue is towards private transaction values/volumes. From DBS’ financial model, a -5% decline in FY18F private transaction value would result in earnings to fall by 23%, almost a by a factor of 5x. The report ended by valuing APAC at 10x forward P/E based on FY18F EPS of $0.0657; this implies a historical FY17A P/E of 8.2x based on FY17A EPS of $0.0803. Using the same valuation multiple on Propnex, the implied target price is $0.36 based on FY17A EPS of $0.0440, representing a 40% downside.


In my opinion, the report is too optimistic. More specifically, the -5% forecasteddrop in private transaction value is too optimistic and that we should be expecting low-to-mid-teenpercentage (e.g. 10-15%) declines instead. Also, it is quite hard to justify paying 10x forward P/E when you are facing significant negative earnings growth in the near term and the everpresent regulatory risk. Here are two reasons why:



Firstly, the property developers have been backloading their project launches into 2H18 so as to maximize selling prices amidst the euphoria. Given the new cooling measures, property developers may not be able to sell the bulk of the units as easily and quickly as they would have hoped.


Secondly, according to a Colliers report published on 10 July 2018 [Click here], it expects/states the following:




  1. New home sales to decline significantly in the initial few months as the market takes stock of the potential implications.

  2. The last two rounds of cooling measures announced in Jan 2013 and Jun 2013 caused new home sales to drop 65% in Feb 2013 and 73% in Jul 2013 respectively.

  3. For the whole of 2018, it expects new private home sales (excl. ECs) to be 15-20% lower compared to 2017.

  4. It also expects developers to delay launches as they adjust strategies after the implementation of the new measures; inventory may take a longer time to sell.


  5. Collective sales to cool and land rates to drop as developers take into consideration the higher ABSD and 5% upfront tax.


  6. Tighter LTV limits to slow demand; expected to delay home-buying even for some genuine owner-occupiers.




Source: Monetary Authority of Singapore


Given the fact that DBS was the Issue Manager and Underwriter for APAC’s IPO, it may be predisposed to be more upbeat of APAC’s prospects.


RHB maintains APAC at a Buy, TP $0.77 (from $1.35, -43%)




Source: RHB


RHB took a bit more time to downgrade APAC’s TP by 43% to $0.77. While the broker has a more bearish view on the property transaction values (-10% in 2018, -5% in 2019), its financial model suggests less sensitive impact on APAC’s bottom line.


RHB’s TP of $0.77 is DCF-derived using a WACC of 8%. While APAC is a cash flow generative business, it is a cyclical one. Cyclical businesses’ cash flows are hard to forecast due to economic cycles. As such, the reliability of using the DCF method on a cyclical business such as APAC is limited. Furthermore, besides cyclicality, APAC exposed to above-average regulatory risks, which should warrant a higher WACC (i.e. above 10%). This should bring TP down a third to approx. $0.52. In addition, the DCF model seems to have left out the $72.8m acquisition of the commercial property in Toa Payoh. If and when completed, APAC will be in net debt position and have negative free cash flow in FY18, both of which will further reduce the DCF derived TP.


Key risks



  • Property transaction volume declines more than expected (Short-term risk)

  • Additional cooling measures imposed by the Singapore Government (Short-term risk)

  • Brokerage commissions to fall from disruptive technology (Long-term risk)

    • Similar to the stock brokerage industry where trades are now executed mainly online (min. $10) and not through brokers (min. $40)




Conclusion


To conclude this article, no premium should be accorded to any market leader(s) whose profitability is so highly dependent on the regulatory climate.APAC/Propnex doesnot have any pricing power and its profitability/valuation rests upon the whims of policymakers. Case in point, APAC’s valuation by DBS was cut by half in less than 24 hours despite clear and strong fundamentals. In this kind of operating environment, there is little management can do to value-add.


APAC is superior to Propnex in terms of absolute revenues & profits, revenue diversity, geographical presence, profitability margins, and valuations. APAC should trade at higher valuations than Propnex, but we have the opposite right now. I believe that over time, as both companies report their quarterly financial results, the market will adapt and the pair will at least trade at the same valuation multiples.


Alternatively, if possible, since Propnex’s shares are valued at a 13.3x P/E, it should just buyout APAC (valued at 7.5x P/E) from the latter’s controlling shareholder, Northstar, which is a private equity firm. The deal will be instantly earnings accretive and solidify Propnex’s position as number 1 in Singapore.


Disclaimer: I am not vested in either company. But if I had to choose one, I would certainly go for APAC.


The post A Song of Fire & Ice – APAC Realty & Propnex appeared first on The Little Snowball.


$APAC Realty(CLN.SI) $PropNex(OYY.SI)

Read more
A Song of Fire & Ice – APAC Realty & Propnex
- Original Post from The Little Snowball



Source: The Business Times


Introduction


As an investor, you could have all the numbers and all the facts, be completely right in your investment thesis, and yet, still lose money. The property recovery story was perfect, the stars were all aligned, and yet, in less than 24 hours, whatever bullish investor sentiment waseviscerated. It was just last week where The Business Times published the article above, re-reading it now reminds me of the quote: “Man plans. God laughs”.


There is enough well-written coverage on the latest round of cooling measures so I will not be covering it in this article. What I will do, is to discuss the investment merits and valuations of APAC Realty and Propnex.


To recap:



APAC was listed in Sep 2017 at $0.66 per share with a market cap of $205.3m.



Propnex was listed in Jun 2018 at $0.65 per share with a market cap of $240.5m.


Summary



  • There is currently a huge valuation gap/mispricing between Propnex and APAC.

  • At $0.585, Propnex is trading at 13.3x FY17 P/E with a market cap of $216.5m.

  • At $0.605, APAC is trading at 7.5x FY17 P/E with a market cap of $195.2m

  • Propnex is trading at a 77% premium to APAC despite inferior fundamentals.

  • APAC is trading at a 44% discount to Propnex despitesuperior fundamentals.

  • The pair should trade at a closer valuation given no unique competitive advantages of either company.

  • Either Propnex is overvalued or APAC is undervalued.

  • Biased towards Pronex being overvalued.

  • Catalysts will be 2Q & 3Q results, and end of Propnex’s moratorium in Jan 2019.


Unbelievable Valuation Gap Bound to Narrow



The valuation gap between APAC and Propnex was narrowing the first few trading days post-Propnex’s IPO. Even during the day after the cooling measures, the valuation gap did not move much. The next week, however, the gap spiked to 78% and ended above 76% at last close (13 July 2018).Plausible reasons for the persistent mispricing could be due to share purchases by the stabilizing manager and insiders (discussed further below) of Propnex.


With reasons I will substantiate in the rest of the article, I posit that the valuation gap will narrow over time and that APAC should trade at a premium compared to Propnex.



Propnex’s Stabilising Manager Out Of Bullets



Source: SGX




Source: InvestingNote


In just two days, UOB Kay Hian, the stabilizing manager maxed out the total number of shares it can repurchase from the open market amidst the aggressive selling. On 9th July (2nd day), Propnex’s shares closed 14.6% higher. If you look at the total market trading volume of that day, 42% was attributed solely to UOB Kay Hian. If it were not for the stabilizing manager, shares of Propnex would certainly be trading at much lower levels.



Propnex’s Insiders Propping Up Share Price



Source: SGX


The day after the stabilizing manager ran out of bullets, the insiders joined the fray by buying up shares in the open market. In 4 trading days, they have since repurchased a total of 2.05m shares between $0.575-$0.590. I am not certain how long the insiders can/will continue doing so but I am certain they cannot do it forever.



Propnex’s Moratorium To End In Dec 2018



Source: InvestingNote


The price chart above belongs to APAC. One interesting point to note is that the end of APAC’s moratorium on 27 Mar more or less coincided with the beginning of its downtrend. Perhaps Propnex might experience similar price action when its moratorium ends on 1 Jan 2019. Then again, correlation does not mean causation.



Absolute Revenues & Net Profits – APAC beats Propnex



Based on the latest audited financial statements of APAC and Propnex, you can see that while Propnex is marketed as the “largest real estate agency in Singapore”, APAC delivered higher revenue and net profit.


Revenue stream diversity – APAC beats Propex



Source: Propnex Prospectus


Source: Propnex Prospectus Page 58



Source: APAC Annual Report 2017 Page 6


In the front coloured pages of Propnex’s prospectus, it showed that it has four core business segments namely: 1) Real Estate Brokerage, 2) Training, 3) Property Management, and 4) Real Estate Consultancy. However, if you turn to page 58 (non-coloured) of the same prospectus, you find that Real Estate Brokerage accounted for a whopping 99.1% of FY17 revenue. Training and Property Management accounted for only 0.3% and 0.6% respectively. No revenue was attributed to Real Estate Consultancy. Since when does a zero to sub-1% of contribution to revenue become recognized as a core business segment? The fact that Propnex showed glamour in the front pages of the prospectus but hid the specific figures 58 pages into the ponderous tome makes me feel uneasy.


APAC, on the other hand, provided a clear breakdown of its gross profits in its 2017 Annual Report on page 6. In FY17, 84.9% came from Brokerage while 15.1% came from Non-Brokerage.


While both Propnex and APAC are heavily reliant on brokerage as a revenue driver, it appears that the latter has a more diversified revenue stream compared to the former.


Geographical Presence – APAC beats Propnex



Source: Propnex Prospectus



Source: APAC Annual Report 2017


As at 6th June 2018, there are 7,248 Propnex agents in Singapore. As at 25th April 2018, there are 6,100 APAC agents in Singapore. While Propnex is the largest in Singapore by agent count, APAC beats Propnex when it comes to geographical presence.


While Propnex is still in discussion to expand to Vietnam, APAC had already done so last year and now has 308 agents there. Also, compare the numbers for Malaysia and Indonesia, APAC has more agents there as well. APAC also has agents in places Propnex has not even been/considered yet (Korea, Japan, Taiwan, Cambodia).


Propnex may be the largest real estate agency in Singapore with over 7,000 agents, APAC is the largest international real estate agency in the Asia-Pacific region with 17,500 agents.


Ratio Analysis – APAC beats Propnex





Source: Company Prospectus and Annual Report


The charts speak for themselves, in terms of gross profit margin, operating profit margin, net profit margin, APAC beatsPronex. This is despite the fact that APAC incurred a one-off IPO expense of $1.2m; if not, operating margin and net profit margin would be higher.


In terms of financial position, both companies are on par, net cash position is approximately 30% of their respective market caps. I have not factored in the yet-to-be-completed Toa Payoh property purchase for APAC.


No smoke without fire – Propnex & DWG in recent news for the wrong reasons



Source: The Straits Times



Source: The Straits Times



Source: The Straits Times



Source: The Business Times


Corporate governance is a crucial determinant of the long-term sustainability of any enterprise, the recent Midas saga is a great testament to that point. A simple google search on recent news related to Propnex and APAC would raise red flags on the corporate governance and business practices regarding the former. Hence, it seems like Propnex is more exposed to compliance and reputational risks which may translate to fines or loss in brokerage revenue, both of which would hurt valuations.


DBS downgrades APAC to fully valued, TP $0.66 (from $1.22, -46%)



Source: DBS Group Research


After the cooling measures were announced, DBS promptly downgraded APAC to fully valued from a buy, revising TP to $0.66 from $1.22 (-46%). One salient point in the report is how highly sensitive APAC’s revenue is towards private transaction values/volumes. From DBS’ financial model, a -5% decline in FY18F private transaction value would result in earnings to fall by 23%, almost a by a factor of 5x. The report ended by valuing APAC at 10x forward P/E based on FY18F EPS of $0.0657; this implies a historical FY17A P/E of 8.2x based on FY17A EPS of $0.0803. Using the same valuation multiple on Propnex, the implied target price is $0.36 based on FY17A EPS of $0.0440, representing a 40% downside.


In my opinion, the report is too optimistic. More specifically, the -5% forecasteddrop in private transaction value is too optimistic and that we should be expecting low-to-mid-teenpercentage (e.g. 10-15%) declines instead. Also, it is quite hard to justify paying 10x forward P/E when you are facing significant negative earnings growth in the near term and the everpresent regulatory risk. Here are two reasons why:



Firstly, the property developers have been backloading their project launches into 2H18 so as to maximize selling prices amidst the euphoria. Given the new cooling measures, property developers may not be able to sell the bulk of the units as easily and quickly as they would have hoped.


Secondly, according to a Colliers report published on 10 July 2018 [Click here], it expects/states the following:




  1. New home sales to decline significantly in the initial few months as the market takes stock of the potential implications.

  2. The last two rounds of cooling measures announced in Jan 2013 and Jun 2013 caused new home sales to drop 65% in Feb 2013 and 73% in Jul 2013 respectively.

  3. For the whole of 2018, it expects new private home sales (excl. ECs) to be 15-20% lower compared to 2017.

  4. It also expects developers to delay launches as they adjust strategies after the implementation of the new measures; inventory may take a longer time to sell.


  5. Collective sales to cool and land rates to drop as developers take into consideration the higher ABSD and 5% upfront tax.


  6. Tighter LTV limits to slow demand; expected to delay home-buying even for some genuine owner-occupiers.




Source: Monetary Authority of Singapore


Given the fact that DBS was the Issue Manager and Underwriter for APAC’s IPO, it may be predisposed to be more upbeat of APAC’s prospects.


RHB maintains APAC at a Buy, TP $0.77 (from $1.35, -43%)




Source: RHB


RHB took a bit more time to downgrade APAC’s TP by 43% to $0.77. While the broker has a more bearish view on the property transaction values (-10% in 2018, -5% in 2019), its financial model suggests less sensitive impact on APAC’s bottom line.


RHB’s TP of $0.77 is DCF-derived using a WACC of 8%. While APAC is a cash flow generative business, it is a cyclical one. Cyclical businesses’ cash flows are hard to forecast due to economic cycles. As such, the reliability of using the DCF method on a cyclical business such as APAC is limited. Furthermore, besides cyclicality, APAC exposed to above-average regulatory risks, which should warrant a higher WACC (i.e. above 10%). This should bring TP down a third to approx. $0.52. In addition, the DCF model seems to have left out the $72.8m acquisition of the commercial property in Toa Payoh. If and when completed, APAC will be in net debt position and have negative free cash flow in FY18, both of which will further reduce the DCF derived TP.


Key risks



  • Property transaction volume declines more than expected (Short-term risk)

  • Additional cooling measures imposed by the Singapore Government (Short-term risk)

  • Brokerage commissions to fall from disruptive technology (Long-term risk)

    • Similar to the stock brokerage industry where trades are now executed mainly online (min. $10) and not through brokers (min. $40)




Conclusion


To conclude this article, no premium should be accorded to any market leader(s) whose profitability is so highly dependent on the regulatory climate.APAC/Propnex doesnot have any pricing power and its profitability/valuation rests upon the whims of policymakers. Case in point, APAC’s valuation by DBS was cut by half in less than 24 hours despite clear and strong fundamentals. In this kind of operating environment, there is little management can do to value-add.


APAC is superior to Propnex in terms of absolute revenues & profits, revenue diversity, geographical presence, profitability margins, and valuations. APAC should trade at higher valuations than Propnex, but we have the opposite right now. I believe that over time, as both companies report their quarterly financial results, the market will adapt and the pair will at least trade at the same valuation multiples.


Alternatively, if possible, since Propnex’s shares are valued at a 13.3x P/E, it should just buyout APAC (valued at 7.5x P/E) from the latter’s controlling shareholder, Northstar, which is a private equity firm. The deal will be instantly earnings accretive and solidify Propnex’s position as number 1 in Singapore.


Disclaimer: I am not vested in either company. But if I had to choose one, I would certainly go for APAC.


The post A Song of Fire & Ice – APAC Realty & Propnex appeared first on The Little Snowball | Personal Finance | Investing| Courses.


$APAC Realty(CLN.SI) $PropNex(OYY.SI)

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$PropNex(OYY.SI)

Anyone managed to get some? Public Offer was approximately 24.6 times subscribed.

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$APAC Realty(CLN.SI)

An opportune time for a PropNex listing - 29 May 2018

PROBABLY in a few months' time, equity investors will have more options to ride the upswing in Singapore's residential market besides developer stocks and APAC Realty, which owns Singapore's second-largest property agency ERA Realty.

PropNex Realty, Singapore's largest homegrown property agency, is preparing for a public listing on Singapore's mainboard in the third quarter of this year. It is already talking to potential cornerstone investors, but has not obtained eligibility-to-list from the Singapore Exchange yet.

The last time PropNex Realty sought to undertake a public listing was believed to be around 2010-2011 after it switched its auditors to KPMG, a big four audit firm. But the plan was placed on the back-burner following a series of property cooling measures.

Now, things are looking up despite all cooling measures still firmly in place. There is broad consensus that the residential market has legs to run for at least two years. It would hence make sense for PropNex Realty to seek a public listing now.

Continued pent-up buying demand has already enabled developers to sell more than they have launched so far this year, with the speed of launches and private home price growth likely to accelerate in the second half of this year.

The largest agencies here are hence in a strong position to benefit from the ongoing boom in residential sales given their dominant market share of property transactions and project marketing jobs from developers. PropNex Realty, which has 7,208 agents, and ERA Realty, which has 6,105 agents, have each secured around 20 project marketing jobs from developers this year.

Earnings visibility

Property agencies thrive on transactions. The large launch pipeline from collective sale sites and government land sale sites sold offers earnings visibility for PropNex for the next two years. Last year, PropNex Realty's after-tax profit of S$8.7 million more than doubled from S$4.17 million in 2016 on the back of a 47 per cent surge in revenue to S$341.32 million.

Its agents clocked more than 56,000 transactions last year, after factoring in Dennis Wee Group (DWG)'s contribution for the last four months of 2017, up from 46,229 in 2016. PropNex merged with DWG last year. From 2013 to 2017, PropNex Realty enjoyed a compounded annual growth of 17 per cent in net profit.

The earnings of APAC Realty, which was listed last September, have evidently been buoyed by market recovery too. Investors have piled into the stock, causing its share price to surge as much as 94 per cent from its IPO price of 66 cents. But since March, APAC Realty's share price has been correcting from a high of S$1.28, prompting speculation that institutional investors may be seeking a rotational shift into PropNex Realty when it is listed.

For investors looking to buy into such stocks, they should be aware of the cyclical nature of the property agency business. While the near-term market outlook is positive, whether it can be sustained over the longer term remains uncertain, with policy risks lurking in the horizon. Potential external economic shocks can also turn the tide.

The continued success of property agencies also hinges on their ability to retain and recruit agents, and their ability to stay relevant and competitive in the face of technological disruptions.

There is already a rising trend of "DIY" (do it yourself) transactions, facilitated by property portals. In the HDB resale market, the DIY rate has grown from 11 per cent in 2010 to 28 per cent in 2017. It remains to be seen if the government's push towards fully digitalised and seamless property transactions will further entrench this DIY movement. Agencies will have to look at tapping technology and innovating to add value to their clients' experiences.

Their constant need to retain agents with incentive schemes and to stay abreast of technology will add pressure to their already thin gross margins. In this low-margin business, agents typically take home 70 to 90 per cent of the commissions.

But so far, PropNex Realty has demonstrated a track record of profitability across property market cycles. Formed from a merger of agencies in 2000, PropNex has grown steadily under the leadership of its gumptious CEO Ismail Gafoor, who owns 62 per cent of P&N Holdings, the parent firm of PropNex. As the flagship subsidiary of P&N Holdings, PropNex Realty makes up 70-80 per cent of P&N's earnings.

Size matters

In an industry where size matters, PropNex Realty has benefited from a consolidation sweeping the industry. In 2014, it took over sales associates from JLL when the latter acquired a 20 per cent stake in PropNex's project marketing arm PropNex International. A bigger milestone for PropNex Realty came last year when it merged with DWG - a move that added more than 800 agents to PropNex Realty and lifted it to top position in terms of number of agents. Outside of Singapore, PropNex has launched a regional franchise, starting with Indonesia and Malaysia.

With the IPO proceeds, PropNex will probably be able to expand its range of services and geographical presence in the Asia-Pacific region more aggressively. Plans are afoot to extend its regional franchise.

It would be better for PropNex to list soon lest it has to conduct a further audit of its books for the first six months of this year. It also makes sense for it to tap the bullish sentiment in the residential market soon before the party is over.

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