• 2Q19 results missed our estimates. We slashed our FY19e earnings by 32%. Transaction volumes were much weaker than our initial assumptions.
• PropNex maintained its impressive market share of new launches at around 48%. It expanded its agency force by 649, the most in the industry this year. PropNex maintains its status as the largest real estate agency in Singapore with 8049 agents.
• Net cash of S$73mn and interim dividend payout of 81% (or S$ 1.25 cents).
• We maintain our BUY recommendation. Our target price is lowered to S$0.59 (previously S$0.63). We cut our FY19e and FY20e net profit forecast by 32% and 35% respectively. Our target price was cut less materially as we lowered our estimates in working capital required.

The Positives

+ Market share has crept up. Market share for PropNex for new launches in 2Q19 is around 48%. This has climbed from around 43% last year. The company’s aggressive and consistent engagement sessions and seminars with consumers have been one of the distinguishing factors to their rise in market share. Consumers gain more confidence when there is a better understanding of the market and project. The number of agents for PropNex has risen by around 649 or 9% this year to 8,079. PropNex has expanded its agency force the most this year. 

+ Building the foundation overseas. The agency force in Indonesia, Malaysia and Vietnam continues to build up. The combined number of agents in these three countries are around 2,100 agents. Vietnam agency was started this year.

The Negatives

– Private resale revenues the worst hit. Resale revenue was down around 47% YoY in 2Q19. Transactions have collapsed as owners are holding on for higher prices. Interest rates are falling and there is generally no urgency to sell.

– Soft HDB prices affecting demand and re-issuance of option. Mass market demand is dependent on HDB upgraders. However, there is less equity (or gains) that can be extracted as HDB prices have been less rosy. During the 2007-13 period, HDB resale prices doubled (Figure 1). However, since the 2013 peak, HDB prices are down 12%.  There will be less equity for the estimated 30,000 HDB units completing their 5-year minimum occupancy period this year. A larger portion of buyers being HDB upgraders and resale market turning less vibrant, are some of the reason for the larger occurrence of options re-issuance. This delays the recognition of revenue for the agents.

Outlook

We expect 2H19 to improve. We have seen a significant rebound in July 2019 transactions.  There will be 45 projects (17,000 units) to be launched in 2H19. The sentiment is admittedly weak. Nevertheless, some of the reasons prompting the purchase of private properties include (i) private property prices will remain elevated due to the high land cost of developers; (ii) continue building an asset base for retirement and wealth transfer for future generations.

Maintain BUY with a lower target price of S$0.59 (prev. S$0.65)

We maintain our BUY recommendation. Our target price is lowered to S$0.59 (previously S$0.63). We cut our FY19e and FY20e net profit forecast by 32% and 35% respectively. Our target price was cut less materially as we lowered our estimates in working capital required. Whilst industry volumes are down this year, PropNex has managed to expand its market share and agency force this year. We like PropNex for the high unleveraged return on equity, strong balance sheet, attractive dividend yield and impressive cum rising market share.