APAC Realty is expanding its footprint in Vietnam, a long-term positive move that aims to fill the gap from muted growth in its key Singapore market, says DBS Group Research analyst Ling Lee Keng.
In a Jan 17 note, Ling is maintaining “hold” on the real estate services provider and operator of the ERA brand with an unchanged target price of 59 cents.
On Jan 9, APAC Realty proposed to increase its stake in ERA Vietnam to 60% from the current 38%. “Near-term, the real estate industry could be affected by globally tightening liquidity on the back of the rising interest rate environment and global economic slowdown. The Vietnam market is still at its nascent growth stage compared to Singapore. Though the Singapore market remains resilient, growth could be muted given its land scarcity,” writes Ling.
The acquisition is fairly valued, she adds. Including the previous acquisitions in 2020, the blended valuations work out to $10.7 million, or price-to-sales of 0.9x. Blended valuations would increase to $28.2 million if the maximum earned out incentive is achieved by 2025. Price-to-sales ratio would then be reduced to 0.4x, assuming a target revenue of $70 million.
“This would imply a P/E ratio of 8.1x, if we factor in a net margin of 5%. APAC Realty currently trades at 8.2x and 9.1x P/E for FY2022 and FY2023 respectively. Hence, we view this acquisition as fairly valued,” writes Ling.
DBS has not factored any contribution from the proposed acquisitions as the contributions are still relatively insignificant, says Ling, with a net profit of about $100,000 as at June 2022 on high overhead costs. “We expect more meaningful contribution from 2025 onwards.”
See also: APAC Realty raising stakes in ERA Vietnam, Eurocapital to 60% for $4.9 mil
By 2026, management expects ERA Vietnam to have four mega offices covering the entire Vietnam in Ho Chi Minh City, Da Nang, Ha Noi and Can Tho. ERA’s office in HCMC was established in 2017 while the sales office in Da Nang was opened in 2021.
Other targets are a headcount of 8,000 licensed agents, more franchisees with small-mid developers, targeting 10 projects from 2022-2026 and more exclusive or lead agency appointments.
ERA Vietnam secured 30 project appointments in 2022, and 23 in 2023 as of now.
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Upon completion of the transaction, APAC Realty will increase its shareholding in ERA Vietnam and Eurocapital, sub-franchisor of the ERA brand to ERA Vietnam, to 60% each.
Together, the sum payable upfront is $4.9 million with an earn-out incentive of up to $10.5 million. “The earn-outs were structured in order to incentivise the sellers to achieve the performance targets and further the growth and success of ERA Vietnam and Eurocapital,” says APAC Realty.
Of this earn-out figure, $2.8 million is subject to certain conditions and based on the revenue and net income generated by ERA Vietnam and Eurocapital from July 1, 2023 to June 30, 2024. To unlock this sum, ERA Vietnam must achieve $35 million in revenue and at least $1.75 million in profit after tax within this period.
The remaining $7.7 million in earn-out incentive is slated for the period from Jan 1, 2025 to Dec 31, 2025. The target for this period is $70 million in revenue and $3.5 million in profit after tax.
APAC Realty had invested $1.5 million for a 38% stake in ERA Vietnam in February 2020. In 4Q2020, the Group also put in a loan of $1 million for expansion.
Along with this acquisition, APAC Realty plans to extend a shareholder loan of $1.5 million to ERA Vietnam. According to APAC Realty, the loan proceeds will be used to support ERA Vietnam’s plans to expand its offices and to secure new project launches and capture more market share.
ERA Vietnam has the right to draw down on the loan from its agreement until June 30, 2023. The loan will mature five years from the drawdown date with a 5% per annum interest rate.
As at 10.51am, shares in APAC Realty are trading flat at 59.5 cents.
