Analysts from UOB Kay Hian and CGS-CIMB Research have reiterated their “buy” calls for PropNex, each maintaining target prices (TPs) of $2.07, even as the company reported year-on-year (y-o-y) declines of 11.4% in revenue and 15% in gross profit for the 2QFY2022 ended June.
Slower project marketing revenue, partly offset by higher agency services revenue, saw PropNex post a revenue of $230.7 million and gross profit of $23.7 million for the quarter, with gross profit margins slipping to 10.3%, notes CGS-CIMB’s Lock Mun Yee, whose TP is based on a blend of net cash-adjusted P/E and discounted cashflow (DCF) valuation. PropNex is trading at a cash-adjusted FY2022 P/E of 10x.
Lock writes: “For FY2022, management expects homes sales in Singapore to drop 30% to 40% y-o-y due to the impact from the property cooling measures announced in Dec 2021 and dwindling unsold inventory. That said, management indicated that it anticipates private home prices in Singapore to rise 7% to 8% in 2022 due to limited new launch supply.”
She adds that she believes that PropNex’s sales force, which has grown to 11,745 agents as at Aug 2022, will enable the company to garner more market share.
Meanwhile, UOB Kay Hian’s Adrian Loh says that these results were “largely in line with expectations”, and accounted for 48% of his full-year estimate for FY2022. “The company saw a 19% y-o-y decline in project marketing revenue due to a lack of new launches in 1HFY2022; however, this was somewhat offset by its other businesses — notably, the rental and private resale segments saw 28% and 12% y-o-y increases in revenue respectively,” writes Loh.
He notes that PropNex’s proposed interim dividend of 5.5 cents was a 75% payout compared to his expected 70% payout and implies an annualised yield of 6.6%.
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PropNex’s commission from agency services rose 4.1% y-o-y in 2QFY2022 to $139.1 million, a 12.3% y-o-y increase for 1HFY2022 as the group continued to expand its market share amid slower market volumes.
“In 1HFY2022, volume transaction in the private resale market fell 21.4% y-o-y while rental activity declined 8.9% y-o-y. There was also a 6% drop in Singapore’s HDB resale market transaction volumes. PropNex expects the overall private resale volume to shrink 15% to 20% y-o- y to 15,000 to 16,000 in FY2022 and projects HDB resale transactions to slide 5% to 10% for the year,” says CGS-CIMB’s Lock.
She notes that PropNex also expanded its footprint to Australia in 2QFY2022 with the establishment of an office in Melbourne, securing collaborations with builders and developers to market locations in both Melbourne CBD and in growth suburbs.
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Loh says that PropNex has not “ruled out” the potential of more cooling measures in light of the continued strong price increases for both private and HDB segments. For the private residential segment, he says that PropNex believes that the total debt servicing ratio may be tightened. “Of greater concern is the HDB resale segment given the 12% y-o-y price increase last year and this year’s potential for a 10% y-o-y increase, which is not politically palatable, in our view,” writes Loh.
Despite the lack of significant new property launches in 1HFY2022, the UOB Kay Hian analyst believes that PropNex’s revenue recognition for its project marketing segment should be strong in 2HFY2022 due to timing differences.
Loh says that properties of note that were launched in 1HFY2022 include Liv@Mountbatten, Piccadilly Grand and Amo Residences, of which 37%, 47% and 52% of units were sold by PropNex respectively. “In addition, we highlight that out of the 30 new residential properties that are slated to be launched in 2HFY2022, the company has been appointed as marketing agent for 27 of them, which underlines the potential for better performance in 2HFY2022. In stark contrast to the 30 slated for launch in 2HFY2022, only nine new properties were launched in 1HFY2022,” he writes.
He also points out that PropNex forecasts a significant amount of new property launches in 2023, which could prove to be a “bumper year”, due to the recent increase in government land sales as well as the higher success rate of en bloc sales. “The increased supply coming into the market could cause property prices to soften in the medium term,” says Loh, who adds that easing Covid-19 travel restrictions could see foreign buyers “gradually” returning to the Singapore property market.
CGS-CIMB’s Lock says that “stronger-than-projected” residential market performance and contributions from enbloc transactions are potential re-rating catalysts, while UOB Kay Hian’s Loh has identified strong sell-through of new property launches in 2HFY2022 and a “higher-than-expected” final dividend for 2022 as his share price catalysts.
PhillipCapital's Paul Chew has kept his "neutral" call as PropNex's revenue and PATMI for the 1HFY2022 stood within his expectations. Chew's target price of $1.74 has also remained unchanged.
In his report, the analyst expects to see further weakness in PropNex's earnings, especially from new project revenue.
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"There were only an estimated 1,548 new residential units launched in 1HFY2022, a decline of 70% y-o-y from 5,222 units [in] 1HFY2021. As revenue from new launches are recognised typically six months after completion of the home sale, new launches may recover from a planned 5,183 units earmarked for 2HFY2022," he says.
"Rising HDB prices and interest rates may lead to some additional tightening measures. We worry the current total debt serving ratio (TDSR) stress test interest rate of 3.5% may be raised. Without a BTO supply lever to dampen prices, other direct intervention by HDB is also possible," he adds.
Looking ahead, the analyst sees property prices remaining elevated.
"We believe there is a virtuous cycle underway. HDB owners may enjoy gains that are used as equity (est. $300,000) to upgrade into the private residential market. Meanwhile, buyers of HDB resale include private property owners looking to cash out and move into HDB units," Chew writes.
"Other macro tailwinds include rising income levels, low supply, healthy developer balance sheet and higher priced land bids," he adds.
As at 1.58pm, shares in PropNex were trading flat at $1.67 with a dividend yield of 7.49%.
