Analysts at RHB Bank Singapore and CGS-CIMB Research have lowered their target prices for APAC Realty following a weaker-than-expected earnings for the 1HFY2023 ended June, which was down 70% y-o-y to $5 million.
Analyst Lock Mun Yee from CGS-CIMB has reiterated her “add” call with a lower target price of 70 cents from 77 cents previously, while RHB’s Vijay Natarajan has maintained his “neutral” call and lowered his target price from 57 cents to 54 cents, representing a 5% downside.
Both Lock and Natarajan say that APAC Realty’s results came in below their expectations due to higher operational costs and a drag from its overseas operations.
Lock from CGS-CIMB highlights that the company reported a 24.2% y-o-y decline in revenue to $259.6 million, while patmi fell 70% y-o-y to $5 million. The weaker y-o-y revenue performance was due to lower brokerage revenue from both new home sales and the resale and rental market.
“Although gross profit margin stayed relatively stable at 10.2% in 1HFY2023, pre-tax/net margins fell to 2.3%/1.9%, due to higher personnel expenses due to digital strategy expansion, increased interest expenses, and a slight drag from overseas operations,” she says.
However, Lock believes that there are reasons to remain positive on APAC Realty. For one, she notes that there are growing resale commissions occurring through the rising salesforce in the company.
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APAC Realty generated $182.7 million of brokerage revenue from resale and rental commissions in 1HFY2023, a 8.2% y-o-y decline due to a 22.8% and 1.9% y-o-y drop in private and HDB resale market transaction volumes, respectively.
Meanwhile, she notes that the rental market registered an 8.8% contraction in leasing activity.
APAC Realty expects private resale activity to shrink 20%-30% y-o-y to 10,000-11,000, while HDB resale volumes would likely remain stable at 27,000-28,000, a sign to Lock that 2HFY2023 sales activity will likely stay relatively stable h-o-h.
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“That said, APAC Realty had increased its salesforce by 5.9% year to date to 8,839
agents at end-June and targets to reach 9,300 agents by end 2023 (and 10,000 by end 2024),” she says. “This should help APAC bolster its resale and rental commissions in 2HFY2023.”
In addition, Lock notes that APAC Realty expects 11 more projects, with a total of 2,534 units, to be rolled out in 2HFY2023, which should bolster revenue from new home sales from FY2024 onwards.
“Furthermore, APAC anticipates its capital markets & investment sales (CMIS) business unit, established in February, to continue to deliver positive results, with three marketing mandates on hand and another eight projects in its collective sales pipeline,” she adds.
Given the weaker-than-expected 1HFY2023 performance, Lock has lowered her FY2023-FY2025 earnings per share (EPS) by 19.2%-20.4%, and has reduced her target price to 70 cents based on an unchanged blend of net cash-adjusted FY2023 P/E multiple of 10x and five-year discounted cash flow valuation.
However, she believes that APAC’s FY2023 results are back loaded, with more new projects to be rolled out and lower drag from overseas operations in 2HFY2023. She says its share price will likely be supported by its projected FY2023 dividend yield of 8.3%, and has therefore reiterated her “add” call.
Likewise, RHB’s Natarajan is expecting a better 2HFY2023 for APAC Realty, noting more contributions from healthy sales across many of its new recent launches.
He says that APAC Realty has been able to maintain its market share, even though competition among agencies remains intense, which will likely result in higher marketing, technology and
recruitment expenses moving forward.
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“APAC’s overseas performance has been disappointing so far but a turnaround is expected next year,” he adds.
However, Natarajan notes that APAC Realty’s operating expenses rose 35% y-o-y on the back of higher personnel costs (+23% y-o-y), marketing expenses (+90%) and other operating expenses (+44%), which were incurred for improving technological capabilities, recruitment as well as setting up costs for overseas operations.
He says that the company’s overseas segment saw a net loss of $1.1 million for 1HFY2023 mainly due to start-up losses at ERA Vietnam, but it is expected to break even and contribute positively from 2024.
As the company has said that it expects operating expenses to remain elevated at these levels, the analyst cuts his FY2023-FY2025 net profit by 12%-14% by mainly imputing higher costs and tweak his weighted average cost of capital slightly lower due to its high cash position, resulting in a lower target price.
As at 2.52pm, shares in APAC Realty are trading 0.5 cents lower or 0.85% down at 58 cents.
