Despite a “hot” property market, DBS Group Research has initiated coverage on PropNex with a “hold” recommendation with a target price of $1.83, implying a 3% upside.
"Our 'hold' recommendation is mainly premised on the stock’s rich valuation in the face of possible property cooling measures with the property market rising," analysts Chung Wei Le and Ling Lee Keng say in a Sept 17 initiation note.
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They highlight that PropNex is currently trading at 11.7 times P/E for FY2022 ending December, which is close to its all-time high and two standard deviations above its historical mean.
“When compared to its peers, it is trading at a 12% premium to its closest peer, APAC Realty, and is in line with its two other international peers’ average of 11.8 times,” they add.
Chung and Ling believe that the risk of policy intervention in the property market is "high", noting that the Singapore residential property price index (PPI) is up 8.9% since the last set of cooling measures in 2018. The last time the cooling measures were invoked in July 2018, the PPI had risen 9% while in the past year, the PPI had risen by 7.1%.
Barring cooling measures, the analysts anticipate property prices could continue rising in 2022, driven by pent-up demand for residential property, more property upgrades due to higher prices, and the low interest rate environment. In addition, construction delays, a smaller pipeline of new launches, and depleting inventory of unsold new launches are also likely to continue supporting prices.
Chung and Ling expect total transaction value to increase by 6.3% in FY2022, with PropNex to benefit given its expanding market share across segments. In FY2020, PropNex reported it had a market share of 48.8% in the private new launch market, 48.3% in private resale, and 57.3% in HDB resale.
“We are projecting a slight increase in its market share to 50.5% (private new launches), 50.5% (private resale), and 58.5% (HDB resale) in FY2022 due to the market leader effect,” the analysts remark.
However, they also caution that PropNex's growth will likely start slowing from 2022 onwards, as lower inventory translates to a smaller market for PropNex to capture.
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In addition, they anticipate PropNex’s gross profit margins to dampen in FY2022 as resale transactions grow following the lower supply of new launches. “We expect gross profit margins to decline from 11.1% in FY2021 to 10.9% in FY2022 due to the higher contribution from the resale segment,” they say.
As at 3.27pm, shares in PropNex are trading down 5 cents or 2.76% lower at $1.76.
Photo: Samuel Isaac Chua/The Edge Singapore
