RHB Group Research analyst Vijay Natarajan has kept a “neutral” rating on APAC Realty with a lowered target price of 60 cents from 75 cents as he sees a “muted outlook ahead” for the property agency.
The analyst previously downgraded the counter’s call to “neutral” from “buy” in his Aug 11 report.
In an Oct 18 report, Natarajan notes that the recent imposition of additional cooling measures and a sharp rising interest rates environment have since dampened the outlook of Singapore’s real estate sector. As a result, the analyst expects transaction volumes to slow down even more, particularly in the resale market.
“This should impact earnings which we expect to decline 11% in FY2023 (ending December 2023),” writes Natarajan, though acknowledging that APAC Realty’s net cash position continues to be good with a decent yield of around 8%.
On the back of his lower target price, the analyst has also lowered his net profit estimates for the FY2023-FY2024 by approximately 15%, factoring in a slower volume growth, particularly in the resale market segment which accounts for around 55% of APAC Realty’s total revenue.
“In the discounted cash flow (DCF) model, factoring in current market conditions, we also raise our cost of equity assumption by 100 basis points (bps), which results in a lower target price,” Natarajan explains.
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Natarajan also expects that new home sales for the full year are likely to come in at the lower end of his expectations of 8,000 to 9,000 units. In addition, overall resale transactions for this year are expected to decline by 15% to 20%, considering the sharp slowdown of resale transactions under the Housing & Development Board (HDB) in 4Q2022.
“For 2023, we expect flattish new home sales and factored in a 10% decline in resale market transactions,” he adds.
The analyst however notes that the company has gradually been building its regional presence, with APAC Realty announcing the purchase of an additional 79.74% stake in ERA Indonesia from Realti Indo Mandiri for a consideration of INR92 billion ($8.5 million) raising its total stake in the listed subsidiary to 85%. The purchase price of INR122 per share is at an approximate 2% discount to the latest closing price of INR125.
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In light of a change of control arising from the transaction, APAC Realty has launched a mandatory tender offer at the same price for the remaining 15% shares, which will close on Nov 16 and also stated its intention to keep the entity listed.
In FY2021, ERA Indonesia’s net profit was INR3.9 billion, based on which the transaction implies a P/E of 30x which Natarajan believes is justifiable considering the massive untapped future growth potential.
To recap, ERA Indonesia holds the ERA country master franchise for Indonesia. As at Sept 30, it had 111 active member broker offices in the major cities of Indonesia with 4,478 agents.
The overall earnings contribution from ERA Indonesia, assuming an 85% stake, continues to be very small at around 1% of total, notes Natarajan. The transaction will be fully funded from internal cash.
Aside from Indonesia, APAC Realty has also been building its presence in Vietnam and Thailand markets with a view on long-term growth.
As at 3.17pm, shares in APAC Realty are trading at 0.5 cents up and 0.88% higher at 57 cents at a FY2022 P/B ratio of 1.21x and dividend yield of 8.8%.
