UOB Kay Hian analysts Loke Peihao and Adrian Loh has maintained their “buy” recommendation on PropNex with a higher target price of 86 cents from 69 cents previously.
This, they say, is due to the real estate agency’s strong cash generation and digital edge which will enable the real estate agency to ride through the storm brought about by the Covid-19 pandemic.
“To better reflect the group’s strong cash reserves (43% market cap), we shift our valuation methodology to 11x 2021F ex-cash price-to-earnings (PE),” they write in a report dated Oct 27.
“PropNex is also better positioned as the ‘preferred suitor’ amid industry consolidation, due to its stronger reputation, training, and more attractive commission structure for agents and team leaders,” they add.
Unlike previous crises, Loke and Loh note that the Singapore property sector will see “resilience” unlike the SARS period in 2003.
According to PropNex’s management, this is due to the “firmer footing” going into the Covid-19 crisis due to the existing policies limiting excessive leverage and speculative buying.
They add that the Singapore property sector will see continued “strength and resiliency” amid the pandemic due to “resilient buying sentiment” according to PropNex’s management at UOB Kay Hian’s Asian Gems E-Conference. The resilience is likely due to liquidity such as low interest rates and government stimulus.
Recent statistics released by the Urban Redevelopment Authority (URA) appear similarly upbeat.
New sales in September 2020 saw its highest level since July 2018 with 1,329 units sold (a 4.6% y-o-y growth) while 3Q2020 URA property price index (PPI) grew by 0.8% q-o-q.
Management also pointed to the resilient and still growing 9M2020 private new home sales volume of 7,532 units, which will likely see volume for the year surpass 2019’s volume of 9,192 units sold.
“Based on Sep 2020 statistics, they observed stable and slight uptick in pricing for Rest of Central Region (RCR) and Outside Central Region (OCR) projects respectively - although Core Central Region (CCR) prices have softened. Management attributed the CCR softness to the absence of foreign buyers due to travel restrictions, and the OCR resilience to HDB upgraders’ demand for mass-market products,” note the analysts.
Loke and Loh are also positive on PropNex due to its strong digitalisation edge. In 2Q2020, the real estate agency saw its market share surge 18.1 percentage points q-o-q to 68.7% in private new launches, which signifies its strong digital presence.
“Like agents of most other agencies, PropNex agents had to reach out to clients via digital platforms during the circuit breaker period. The group has also been a front-runner in hosting Singapore’s first virtual property expo (25-26 July) and the Singapore Property Show (Oct 10), which has boosted its consumer outreach,” they say.
PropNex has accumulated a solid cash hoard of $99.7 million (27 cents per share) for potential distributions and acquisitions, say the analysts.
“The group has demonstrated strong cash generation capabilities, with positive (and growing free cash flow in the last five years (2015-2019). It is desirable during a crisis when most companies reduce operating expenses to preserve cash for survival.”
“Although PropNex has no fixed dividend policy, management has the intention to pay out at least 50% of the group’s net profits (ie 2018/19/1H20: 66.7%/64.6%/76.5% respectively),” they add.
To this end, while the analysts foresee 3QFY2020 earnings for PropNex to be dragged by lower new sales segment contributions, given the substantially lower 1,713 option-to-purchases lodged in 2QFY2020, they add that the real estate agency’s earnings may be past its worst after this quarter.
“Excluding the $1.8 million in one-offs from government grants (e.g. JSS) and rental rebates factored in 2020F, we see 2021F earnings per share growing 2% y-o-y,” they note.
Loke and Loh have also raised their net profit forecasts for 2020-22 by 1-3%, factoring in improved volumes from better liquidity in a low interest rate environment.
“In terms of private resale, we moderated our assumed declines in private resale volumes to -10% (from -20%) in 2020F. For private new sales, we factored in higher overall volumes of 10,000 units (vs 10-year average: 11,538 units p.a between 2010-19) and a 55% market share in 2021F/22F.”
Shares in PropNex closed 0.5 cent lower or 0.8% down at 63 cents on Oct 29.
