SINGAPORE (May 30): RHB Research is reiterating its “buy” call on APAC Realty with an unchanged target price of $1.35, after the research house hosted an investor luncheon with the real estate services provider amid “some investor concerns”.
APAC Realty, which owns ERA Realty Network, has seen its share price tumble around 29% since closing at a peak of $1.26 on Mar 9.
This comes despite APAC Realty reporting a 46.8% surge in earnings to $5.9 million for the 1Q18 ended March, on the back of a 56.7% jump in revenue to $105.2 million on higher contributions from real estate brokerage fees and related services amid a residential market recovery.
See: APAC Realty's 1Q earnings surge 46.8% to $5.9 mil on residential market recovery
“Management addressed queries on market competition, seasonality, balance sheet, gross margins, and its commissions structure,” says analyst Vijay Natarajan in a report on Monday. “Post luncheon, we remain confident that fundamentals remain sound, and view the recent weakness as a buying opportunity.”
Here are five reasons why RHB still believes in APAC Realty as its top pick among the mid-cap real estate counters:
1) Largest market share
Year-to-date, ERA has secured a market share of 41.6% for project launches – more than 10 percentage points higher than the nearest competitor.
Since the start of the year, the number of ERA agents has also risen close to 3.7%, and currently stands at approximately 6,100.
“Management noted that its market share position has remained fairly stable despite the increase in competition,” says Natarajan.
On top of this, the analyst notes that APAC Realty has emphasised that it is focussing more on increasing agent productivity, rather than just increasing headcount.
2) Steady gross margins
Despite a slight dip in gross margins in 1Q18, APAC Realty expects project sales’ average margins to remain steady at 18-20%, while gross margins for secondary sales are expected to remain stable at 6-7%.
In addition, Natarajan notes that the lower gross margins in 1Q18 is partially attributable to a higher percentage of agents currently enjoying a 90/10 commission split.
3) Stronger revenue recognition expected
According to Natarajan, 1Q tends to be weakest quarter for resale and leasing revenues due to the year-end festivities and Lunar New Year celebrations.
“This is mainly due to timing difference between sale of a unit and its earnings recognition. Typically, the time lag between sales and earnings recognition is 3-6 months for new launches and 2-3 months for resales,” he adds.
4) Steady commissions despite bullish market
APAC Realty currently sees commissions from developers of about 1.5%, with the commissions structure for resale transactions has also been fairly steady over the years at 1-2%.
While there have been concerns that a bullish property market might lead to lower commissions for agents, Natarajan opines that this is unlikely.
“Management does not expect developers to lower commissions in a bullish market, as this might lead agents to divert buyers towards projects with higher commissions,” he says.
5) Healthy dividend yield
According to Natarajan, APAC Realty is staying committed to its guidance of at least 50% payout ratio, and does not expect this to be impacted by potential acquisitions.
“It has to be noted that in 4Q17, APAC distributed 90% of its income as dividends. Currently, we have assumed a 60% payout ratio, which translates into a healthy dividend yield of 5.6%,” he adds.
As at 12.08pm, shares of APAC Realty are trading 2 cents lower at 89 cents, implying an estimated price-to-earnings ratio of 10.7 times FY18 – lower than its peers' average P/E of 14 times.
