• 2023 results were below expectations. Revenue and PATMI were 83%/76% of our estimates. 2H23 adjusted PATMI declined 26% YoY to S$26.2mn, dragged down by weakness in new launch transactions. The dividend for FY23 dropped 11% to 6 cents or 6.9% yield.
• Transaction volumes in 2023 disappointed. Consumer sentiment was weak and hesitant with April's rising interest rates and cooling measures. Despite new launches rising by 66% in 2023 to 7,551 units, weakness persisted.
• We lower our FY24e earnings by 16% to S$56mn. Our DCF target price was lowered to S$0.97 (prev. S$1.16) and ACCUMULATE recommendation maintained. We expect a recovery in transactions in FY24e. Driving transactions are recovering sentiment post-cooling measures, a higher number of new launches, a surge in residential completions, resilient HDB prices for upgraders, and lower mortgage interest. PropNex remains the largest real estate agency in Singapore, with 62.5% market share in private residential and HDB resale transactions. The company pays an attractive yield of 6.9% (or S$44mn) backed by S$148mn net cash.

The Positive

+ Market share gains and rising cash pile. PropNex shared that in 2023, its market share in new launches crept up 0.5% to 47.9%. Meanwhile, the share in resale rose a larger 6.8% points to 65.8%. HDB resale declined by 0.4% to 64.7%. It remains the largest real estate agency in Singapore, with 12,233 agents (or 66%). Cash continues to pile up in 2023 with a free cash flow of S$55mn (2022: S$49mn). The dividend payout ratio continues to rise to a record 93% in FY23.

The Negative

- Weakness in new launch revenue. Revenue in new launches declined by 36% YoY to S$128mn. The fall in sentiment post-cooling measure and the larger number of units available for resale affected demand. Gross margins contracted as new launches generate higher margins with the additional 0.5% commission paid to the agency.  

• 4Q22 earnings growth of 24% YoY to S$17.8mn exceeded our expectations. FY22 revenue and PATMI were 107%/107% of our FY22e forecast. Despite lower new launches, PropNex successfully pivoted towards the resale and rental market. The higher GST may have also pulled in earlier recognition of some transactions this quarter.
• Rental was the highlight with revenue growth of 69% YoY to S$56mn. Other areas of strength were private and HDB resale. Final dividend was raised by 14% 8 cents and a 1 for 1 bonus issue was announced.
• We believe the set-up for FY23e is positive. Property prices are expected to be stable but volumes are expected to rebound strongly. New launches are expected to be almost triple last year’s 4032 units. The rental market is expected to be supported by around 17,000 private home completions, and resale could be buoyed by 4,000 EC and 16,000 HDBs (plus higher grants) reaching their minimum occupancy period. Another driver to earnings is the 8% jump in salespersons to 11,667. We raised our FY23e earnings by 8% to S$68.3mn and the target price is raised to S$2.40 (prev. S$2.00). Our BUY recommendation is maintained.

The Positives

+ Strong market share gains. FY22 was a banner year for PropNex. Despite the drop in primary and secondary transaction volumes by 23% and residential leasing being down by 8% in 2022, revenue grew 8% to a record S$1bn. We believe there were market share gains, especially against the smaller agencies. A key differentiator has been their sales process and continuous efforts in engaging consumers that pivoted to the other segments, as primary sales were sluggish due to the collapse in new launches.

+ As expected, ample cash flow. FCF generated in FY22 was S$48.7mn (FY21: S$80mn). There was higher working capital of S$23mn tied up with receivables than a year ago. PropNex ended FY22 with net cash of S$138mn (FY21: S$145mn). The current dividend is around S$50mn p.a., well supported by annual operating cash flow and net cash.

The Negative

- Timing in recognition of commission. In 4Q22, PropNex made an impairment loss of S$5.5mn on receivables. The net impact on the income statement is offset by S$4.1mn derecognition of trade payable to agents. PropNex makes an impairment of its trade debtors for commissions not paid within 365 days. Two developers hit their 5% marketing fees limit. Both developer projects have been fully sold and the commission will be repaid when the projects reach their temporary occupation permit or completion.

• 3Q22 result was a huge earnings beat. YTD22 revenue and PATMI were 96%/96% of our FY22e forecast (excluding one-offs). We underestimated PropNex’s market share gains especially in private resale, the increase in agent size and rise in selling prices.
• Rental remained the fastest growing category. Revenue jumped 76% YoY to $48mn. The rental market has been extremely tight this year with borders reopening.
• We raise our FY22e PATMI forecast by 34%. Our FY22e target price is raised from S$1.74 to S$2.00. The NEUTRAL recommendation is upgraded to BUY. We expect earnings growth to return in FY23e. New home sales will rebound with the expected 11,300 new launches (FY22: 4,500). Resale recovery will be from widening prices compared to new launches. The upside in volumes will be determined by foreign demand. Rental volumes will be supported by the expected surge of TOP units in FY23.

The Positive

+ Resale bucked the trend. Despite the 28% YoY drop to 3,961 in total private resale volumes in 3Q22, PropNex managed to grow revenue by 11% to S$785mn. Reasons for the market share gains include the growth in the sales force and deliberate efforts to focus on resale. The price difference and lack of available units between new launches and resale helped stimulate resale volumes.

The Negative

- New launches are still a drag. Revenue from project marketing declined 12% YoY to S$88mn. The dearth of new launches and inventory has been a drag to revenue. New units transacted in Singapore (excluding EC) are down 38% to 2,187 units in 3Q22. With a balloting process, market share will also be determined by random chance.

Outlook

After two cooling measures and higher interest rates, we do expect some softening in buying interest from euphoric levels. Nevertheless, we remain upbeat that the key drivers supporting selling prices and demand are intact, namely rising residential population, low unemployment rates, new household formations (e.g. 25k marriages), rising land and construction cost, attractive HDB grants, low inventory level (1.5 years vs 3 year average) and return of foreign buyers. On the transaction volumes, the rebound in new launches for FY23 will support project market sales.

• 1H22 revenue and PATMI were within expectations at 62%/62% of our FY22e forecast. We expect further weakness in earnings, especially from new project revenue.
• Rental was the fastest growing segment in 2Q22, rising 23% YoY, followed by HDB. Project marketing revenue fell 29% YoY due to a decline in new launches.
• We maintain our FY22e forecast. Our expectations are a further decline in earnings in 2H22 due to a lagged revenue recognition from limited project marketing sales in 1H22 of around 1,548 units. New launches planned in 2H22 are expected to pick up to 5,183 units. Rising HDB prices and interest rates may lead to some additional tightening measures. We worry the current TDSR stress test interest rate of 3.5% may be raised. Without a BTO supply lever to dampen prices, other direct intervention by HDB is also possible. Our FY22e target price of S$1.74 and NEUTRAL recommendation is maintained.

The Positive

+ Resilient revenue. Despite the weakness in new launches, other segments of the business managed to grow, less impacted by the December 2021 cooling measure. Rental income jumped 23%, followed by HDB resale.

The Negative

- Sluggish new launch revenue. There were only an estimated 1,548 new residential units launched in 1H22, a  decline of 70% YoY from 5,222 units 1H21. As revenue from new launches are recognised typically six months after completion of the home sale, new launches may recover from a planned 5,183 units earmarked for 2H22.    

Outlook

Property prices will remain elevated. We believe there is a virtuous cycle underway. HDB owners may enjoy gains that are used as equity (est. S$300k) to upgrade into the private residential market. Meanwhile, buyers of HDB resale include private property owners looking to cash out and move into HDB units. Other macro tailwinds include rising income levels, low supply, healthy developer balance sheet and higher priced land bids.

In terms of transaction volumes, new home sales are expected to decline more than expected in 2022, from a decline of 20-30% to 30-40%. No change in PropNex volume expectations for the other segments - private resale (decline 20-25%) and HDB resale (decline 5-10%).

• 4Q21 PATMI almost doubled to S$14m. FY21 revenue was within our estimates but PATMI was 5% below forecast due to lower margins.
• Final dividend was raised 75% YoY to 7 cents. FY21 dividend is up 127% to 12.5 cents.
• After cooling measures announced on 16 December, we expect a sharp 28% decline in FY22e. New home sales will bear the brunt of the weakness. Record low inventory of 14.1k, higher stamp duties and TDSR and a more cautious buyer sentiment will keep transactions subdued. In the last two cooling measures of 2013 and 2018, combined new and resale volumes recovered to new highs only after a two- to three-year period. Our FY22e PATMI is cut by 27% to S$43.5mn. Similarly, our DCF target price is lowered from S$2.08 to S$1.74. We downgrade our ACCUMULATE recommendation to NEUTRAL. Dividends are attractive at 5% for FY22e, as the company undergoes a year of consolidation following record earnings last year.

The Positives

+ Surge in revenue with operating leverage. The highest growth was registered in new home sales (+91% YoY) and resale (+65%). HDB resale was resilient with a 10% improvement in revenue.  PATMI grew at a faster pace despite the increase in headcount due to operating leverage.

+ Jump in cash flow and dividends. The asset-light and highly cash generative business model was reflected in FY21. Operating cash flow in FY21 was S$83mn (FY20: S$42mn), driving up net cash on the balance sheet to S$146mn (FY20: S$106mn). The dividend of 12.5 cents in FY21 represents S$46mn. CAPEX in FY21 was S$0.5mn. Our DPS estimates for FY22 of 9 cents is based on a 77% payout ratio (FY21: 77%).

The Negative

- Nil.

Outlook

We expect a lull in transactions this year following the introduction of more cooling measures, namely the increase in stamp duties by 5% to 10% points and lowering of Total Debt Servicing Ratio (TDSR) from 60% to 55%. Nevertheless, we believe demand is generally healthy, especially for HDB:

• Underlying demand from new household formation: Household formation remain healthy with resident marriages still hovering around 21,000 per annum in 2020.
• HDB upgraders equity: Around 35k HDB units are reaching their five-year minimum occupancy period (MOP) in 2022. Potential gains (or equity for upgrading) from such sales range from S$200k to S$300k.
• Cooling measures mixed impact. The recent round of cooling measures has no impact on first-time home buyers for citizens and permanent residents. However, the lowering of TDSR to 55% will have a more meaningful impact. It was reported that 41% of private housing buyers in 2021 would have TDSR above 55%, HDB is much lower at 3%*.

Private new homes. New homes sales are expected to decline significantly due to the low unsold inventory, particularly in the popular OCR region. OCR inventory is only 3,972. The lowering of TDSR will cap the ability to leverage and turn pricing even more elastic. Another headwind will be the time lag for upgraders to purchase their units. The incremental 5% points of stamp duty to 17% for 2^nd home purchase means an extra S$65-75k** of equity for an upgrader before securing a refund. This implies the upgrader will likely rent premises and collect proceeds before upgrading.

Private resales. The benefit of resale remains the lower price point to new launches. This should allow the decline in volumes to be less dramatic than new launches.

HDB resales. HDB will be the most resilient due to the attractive grants, delay in new units or BTO, healthy household formation and large MOP units available for sale.

Market share gains. An important catalyst to sustain revenue will be to increase PropNex’s market share. Since 2019, the number of agents has increased by around 50% to 11,125. PropNex disclosed that its recent market share for new launches post-cooling measures range from 53% to 57%.

Expectations are for prices to rise. Lower supply from developers, delay in HDB BTO units, rising construction costs and improving economic conditions will keep property prices elevated. PropNex expectations are for private residential home prices to rise 3-5% in 2022 (APAC Realty: +1-3%). HDB resale prices are expected to climb higher by 6-8% (APAC Realty: +4-8%).

Downgrade to NEUTRAL from ACCUMULATE with lower TP of S$1.74 (previous S$2.08)

Our FY22e PATMI is cut by 27% to S$43.5mn. Similarly, our DCF target price is lowered from S$2.08 to S$1.74.  We raised our WACC modestly from 9.8% to 10% due to higher interest rates. Our terminal growth has expanded from 0% to 2% on our expectations of expanding long-term growth in property transactions.

• 3Q21 PATMI spiked 113% YoY to S$16.5mn. 9M21 revenue and PATMI were within expectation at 73%/72% of FY21e forecast.
• The fastest growing segment was private resale, revenue tripled to S$70.6mn.
• The company aims to pay out 75%-80% of FY21 PATMI as dividends. We raise our FY21e DPS by 17% from 11.5 cents to 13.5 cents per share. This implies FY21e dividend yield of 7%.
• Our FY21e forecast and DCF target price (WACC 9.8%) of S$2.08 is unchanged. Our ACCUMULATE recommendation is maintained. PropNex’s revenue run rate is at a new level of around S$200mn per quarter, up from S$100mn in the prior years. Supporting this new altitude of revenue will be the record growth in agents, maiden revenues from collective sales and healthy property transactions aided by a recovering economy, low interest rates and rising replacement costs.

The Positives

+ Broad based growth. The doubling of revenue was supported by growth in all segments. Revenue generated from the private resale and project marketing segments posted the highest YoY growth at 198% and 94% respectively. The buoyant resale market bolstered equity values for HDB owners and investors. HDB volumes were perked up by government grants and delays in BTO construction. Private resale demand was supported by the price differential between new and resale units and rising land and construction costs.

+ Full-year DPS guidance raised. PropNex guided FY21e dividends to be 75% to 80% of PATMI. This compares with the 70% payout in FY20. We raise our FY21e DPS by 17% to 13.5 cents per share, implying final dividends of 8 cents Our forecasted annual dividend payout of around S$50mn is well supported by operating cash-flows. 9M21 FCF was around S$57mn.

+ Net cash bulks up to S$123mn. Net cash stood at a record S$123mn as at Sep21. Cash generated from operations was S$23.9mn during the quarter (3Q20: S$9.6mn). Capital expenditure was a paltry S$25,000. The bulk of the cash generated in the quarter was to pay the interim dividend of S$20.3mn.

The Negative

- Nil.

Outlook

We expect the momentum in real estate transactions to sustain. Key drivers include low interest rates, BTO delays, rising land prices and construction costs and an expanding agency force.

Agency force. PropNex onboarded 2,000 new agents year-to-November, double the 924 new agents in 2020. This brings the number of agents to 10,324, one-third the market share of agents in Singapore. PropNex can tap on the network of the new sales force and enhance their outreach efforts. A large number of agents can further raise the company’s transaction market share.

Private new homes. PropNex raised its 2021 new home sales projection from 11k to 12-13k units. HDB upgraders form less than one-third of demand, with the bulk of the demand coming from upgrading of private property owners and investment-driven purchases. However, depleting developer landbanks may cause transactions to taper down next year to 11-12k units.

Private resales. PropNex raised its resale transactions guidance for the second time to 19k units, up from 16k and 18k previously. Resale prices, which can be 25% lower than new homes prices, are an important driver for demand. The price gap is likely to persist given the rising land prices. The lower price points are more palatable for HDB upgraders who prefer larger units.

HDB resales. FY21 transaction volumes are expected to come in at 30k units, up from 24.7k units in the prior year. Demand is driven by first-time home buyers looking to tap attractive government grants to circumvent BTO delays, as well as HDB owners looking to upsize or downsize their existing units.

New collective sales division. PropNex established this new division in 2021. Collective sales transactions are largely handled by property consultants. PropNex’s advantage is its intimate understanding of the market demand at various locations. This provides developers with the confidence that the en-bloc site can garner demand post redevelopment. So far, two en-bloc projects worth around $42mn have been completed. Another S$3bn of collective sales projects are at various stages of completion.

• 4Q20 results beat, with FY20 revenue and PATMI at 108%/108% of our forecasts. Recovery in resale transactions was stronger than expected.
• Revenue grew 19% YoY to S$155mn on a 51% jump in HDB resales and 26% increase in private resales. PATMI declined 9% YoY to S$7.5mn due to associate impairment and lower margins.
• Net cash of S$105.8mn (FY19: S$81.6m) from S$42mn of operating cash flows in FY20. Final DPS was up more than 1.5x to 4 cents.
• Maintain BUY with a higher DCF TP (WACC 9.8%) of S$1.00, from S$0.85. We raised our FY21e PATMI by 11% to S$30.8mn. Revenue estimates increased as we expect a healthier property market in 2021, led by resales. Yields of 6.8% backed by S$105mn net cash, 33% ROEs and an estimated 53% share of residential property transactions.

The Positives

+ Resale revenue recovered sharply. HDB and private residential resales rose a combined 37% YoY to S$62.5mn. HDB volumes were helped by government grants, delays in BTO units and a surge in units reaching their minimum occupation period. HDB resale revenue touched a record high. Private residential resales were bouyed by their large price discounts to newly launched units.

+ Even more cash. FY20 operating cash flows were S$42mn vs. meagre capex of S$0.5mn. Large cash inflows bulked up its net cash from S$81mn to S$105mn. Full-year dividend jumped 57% to 5.5 cents. A S$20.3mn payout is comfortably supported by operating cash flows and cash hoard on its balance sheet.

The Negative

- Impairment of associate. There was an impairment of S$0.5mn for associate Soreal Prop and S$0.16mn for trade receivables in 4Q20.

Outlook

We expect another year of growth led by the resale market.

HDB resales. HDB resales have been stoked by enhanced CPF government grants for HDB purchases in late 2019 and a rise in the number of HDB units eligible for resale on the expiry of their minimum occupation period. An estimated 25,230 HDB flats will cross the minimum occupation period in 2021, higher than the 24,163 in 2020.

Private resales. Industry resale transactions advanced almost 20% in 2020 to 10,729, recovering from the dismal 8,949 transactions in 2019. During the peak years in 2017/18, transactions averaged 13,500. Improving sentiment and resale flats’ widening price differential with new launches supported their demand.

Private new homes. Volumes are expected to dwindle with a slowdown in new launches. But prices are expected to creep up on the back of improving demand and depleting unsold inventories. Inventories are tight especially in the Rest of Core and Outside Core regions.

Cooling measures. Investors were lately spooked by the prospect of new cooling measures from the authorities. The steepness of any rise in the property price index will be the obvious trigger. Before the last cooling measures in July 2018, the index had scaled 9.1% in a span of 12 months, over 2Q17-2Q18. In comparison, it is only up 2.2% in the past 12 months or 4Q19-4Q20. It is also only up 5.0% since the last cooling measures in 3Q18. To climb 9% over 12 months, the index would need to add 6% in the coming six months to 166 points.  

Maintain BUY with higher TP of S$1.00, up from S$0.85

Our FY21e PATMI has been raised by 11% to S$30.8mn.  Our FY21e revenue estimates was raised by 9%. We also lowered our WACC from 11% to 9.8% on account of a lower beta observed. An even stronger balance sheet, higher cash flows and reduced earnings volatility are reasons for the lower beta.

• 3Q20 PATMI rose 10.6% YoY to S$6.8mn, far exceeding our forecast. 9M20 earnings form 111% of our FY20e forecast. Despite lockdown, new project revenue was more resilient than expected.
• Revenue from new projects rose 15% YoY to S$51.9mn. Higher market share, billing of earlier projects and successful virtual selling were some of the reasons.
• Net cash of S$94.7mn, up from 3Q19’s S$74.5mn.
• Maintain BUY with a higher DCF TP of S$0.85, from S$0.70. Circuit breaker might have affected resale and rental revenue but not new project sales. Yields of 6% and cash flows of S$28mn p.a. with modest capex and working-capital requirements are what we like about PropNex.

The Positives

+ Project marketing resilient. 2Q20 new home sales for the industry were down 27% YoY. We had expected the weakness to spill into this quarter as there is usually a lag of 2-3 months before revenue is billable. PropNex was resilient due to market-share gains, delays in prior sales due to options re-issuance and its ability to market projects virtually.

+ Cash kept piling up. 9M20 operating cash flow was S$30mn (9M19: S$21mn). As capex was minimal at S$0.2mn, cash buffer should be sufficient to meet our dividend forecast of S$14.8mn (DPU of 4 cents).

The Negative

- Nil.

Outlook

Resale volumes are recovering as consumer sentiment improves. HDB resales should be supported by enhanced grants for HBD purchasers introduced late last year and delays in BTO completions. Meanwhile, project sales could enter a near-term lull in October and November due to delays in new launches. In September, URA had restricted developers from re-issuing options. Potential buyers will likely need greater clarity and time before disposing of their existing properties and committing to new purchases.

Maintain BUY with higher TP of S$0.85, up from S$0.70

We raise our TP as FY20e/FY21e earnings have been increased by 40%/46% to factor in stronger than expected new-project revenue.                           

• 2Q20 PATMI rose 96% YoY to S$7.3mn. Earnings was within our estimates. The drop in transaction volumes during the lockdown will negatively impact 3Q20 earnings.
• Earnings this quarter was supported by a 150% jump in project marketing (new launches) revenue.
• Net cash is a record S$99.7mn (2Q19: S$73mn) due to S$11.9mn cash generated from operations during the quarter and a delay in paying S$8.3mn final and special dividend. Interim dividend per share was raised 20% YoY to 1.5 cents.
• We are maintaining our BUY recommendation and raising our target price to S$0.70 (prev. S$0.60). We made a modest increase to our FY20e earnings by 3% due to the JSS grant but raised our DCF growth assumptions. Near-term, the drop in transaction volumes due to the lockdown will negatively affect 3Q20 earnings. However, we believe transactions have bottomed and have started to recover July onwards. PROP pays a sustainable dividend yield of 7%, enjoys unlevered ROE of 25% and generates high cash-flow of around S$20mn p.a. with minimal capital expenditure and working capital requirements.

The Positives

+ Minimal capex and working capital. Net cash jumped to a record S$99.7mn due to the S$20.4mn generated in 1H20 and a delay in final and special dividend of S$8.3mn (or 2.25 cents). Worth noting that despite the 45% revenue jump in 1H20 to S$241mn, additional working capital required to support the growth was only S$300k and capital expenditure of  S$110k.

+ Project marketing the revenue and margin driver. Revenue from project marketing jumped 148% YoY to S$49.2mn. Gross margins improve as new launches provide a higher share of commission for PROP.

+ Interim dividend raised by 20%. In-line with the jump in profits, PROP raised dividends by 20% to 1.5 cents. This interim payout of S$5.6mn is well supported by the 1H20 FCF of S$20.4mn.

The Negative

- Higher staff cost. Staff cost rose 34% due to higher provision of bonus and salary base. The increase in staff cost inline with gross profits means a loss in operating leverage, unlike the 1Q20. Unclear the split between the variable and fixed components of staff cost.

Outlook

The following are some of the outlook bullet points by segment:

1. New launches: Mass market products in OCR and RCR will gain the most traction with the support of HDB upgraders. CCR is faced with larger enbloc supply and foreign buying slowing down. Transaction volumes have started to recover in July despite the absence of new launches. Another positive is the unsold units (excluding EC) that have been declining the past five quarters from 36.8k units in 1Q19 to currently 27.9k.
2. Private resale: This segment will remain the weak spot. Unlike new launches where developers can lower prices, in the resale market, sellers are holding on to their asking prices leaving a large bid-ask gap.
3. HDB resale: Transactions will be relatively stable between 21,000 to 22,000 units (2019: 23,714 units). The current HDB grants are an attractive incentive for buyers. Furthermore, the delay in construction activity may nudge buyers into resale rather than new BTOs.

In 2Q20, transaction collapsed (Figure 1) as property viewing was restricted and showrooms closed. This will negatively impact PROP 3Q20 results. Nevertheless, we believe a bottom has formed and volumes will start to recover. July has seen private resale doubled to 928 units from prior month 383. New units sales are performing even better at 1,123 units in July and 992 units in June. August appears on track to reach the 1,000 units. Private resale transactions for August seem to be decelerating. PROP managed to capture 53% market share of new private units sold in 2Q20.

Maintain BUY with a higher target price of S$0.70 (previously S$0.60)

We are raising our target price as we increased our terminal growth rate assumption. With the lockdown restrictions being lifted in Singapore, a recovery in volumes is underway. PROP  has a high cash generative asset-light business model with minimal capital expenditure and working capital required. The company is committed to paying attractive and sustainable dividends. The current 7% dividend yield amounts to S$14.8mn payout. This compares to their FCF that averaged S$23mn over the past three years. There is also the added buffer of S$99.7mn net cash on the balance sheet.

• 1Q20 PATMI jumped almost 3x YoY to S$7.6mn. It beat our expectations. The growth came from three-fold spike in project marketing (i.e. new launches) revenue.
• The outlook will be weak for this year. The circuit breaker, weaker economic conditions and higher priced projects will lead to a contraction in the number of transactions. We cut our FY20e earnings by 19%. Earnings impact will only be registered in 2H20e.
• Net cash continues to pile up to S$89.8mn (+S$10mn YoY) in 1Q20 and almost 50% of the market capitalisation.
• We maintain our BUY recommendation. Our target price is lowered to S$0.60 (previously S$0.70). The outbreak has tempered any growth expectations we had for the company. PropNex retains a healthy market share of around 50% and we expect dividends (S$13mn p.a.) can be maintained with the large cash hoard of S$89.8mn.

The Positives

+ 3x jump in project marketing. As it takes 8 to 12 weeks for revenue from the booking of a new project, the growth this quarter comes from the health project sales in 4Q19. Project marketing accounts for 45% of revenue in 1Q20 (1Q19: 20%). For the Top 3 selling projects in 1Q20 (The M, Treasures at Tampines, Jadescape), PropNex market share ranged from 46% to 60%.

+ Cash keeps piling up. Together with the rise in earnings, cash from operations increased S$8.7mn in 1Q20. Capital expenditure was less than S$100k in 1Q20. Net cash on the balance sheet rose to a record S$89.8mn.

+ Huge operating leverage. The operating leverage of the business was visible this quarter. Gross profits doubled YoY to S$15mn whilst staff cost only increased S$560k (or +17.8% YoY). The rise was due to salary increment and additional 1 headcount to 175.

The Negative

- Nil  

Outlook

Management shared their outlook of transactions for FY20e. In a nutshell, the estimates are dire:

a. New launches: 1Q20 industry volumes rose 17% YoY to 2149. This will be supportive of 2Q20e earnings. However, FY20e industry transaction volumes may drop by around 20% to 7900*. These are levels worst than the 12 months post July18.

b. Private resale: 1Q20 volumes jumped 12% YoY to 2080 units. The resale market will be even worst hit than new launch. Without viewing the units physically, there is a higher risk for the buyer if there are issues with the unit. Resale units are unlike new launches where developers are reputable and there is the typical 1-year defect liability for developers. Expectations are for at least a 32% decline in transactions to 6100*.

c. HDB resale: 1Q20 volumes rose 22% YoY to 5893 unit and the highest in 9 years (for a March quarter). The circuit breaker will cause some postponement of purchases in the near-term and overall transaction for FY20e could fall by 10% to 21,500 units. We expect these transactions will be need-driven property purchase.

*PropNex estimate is a decline of 27% for the combined private resale and new projects from 19,150 units in 2019 to 14,000 units in 2020.

The extent of the COVID-19 circuit breaker impact include suspension of property viewings and marketing roadshows, temporary closure of project sales galleries and delays in new launches.

Maintain BUY with a higher target price of S$0.60 (previously S$0.70)

Our target price is lowered as we cut FY20e earnings forecast by 19%. We believe the company intends to position themselves as a high yield paying stock. To maintain dividends at 3.5 cents per annum requires a payout of S$13mn. This is well supported by the cash on hand of $89mn and excludes and further cash generated by the business.