APAC Realty Ltd (SGX: CLN) is a real estate services provider that was listed on Singapore’s stock market at the end of September last year. It has three main business segments: real estate brokerage services; franchise agreements; and training, valuation, and other ancillary services. The real estate brokerage services segment is operated by the company’s wholly-owned subsidiary, ERA Realty Network Pte Ltd, one of the largest real estate agencies in Singapore.
Since hitting a peak of S$1.28 in mid-March 2018, APAC Realty’s share price has tumbled by 57% to S$0.555 at the time of writing. One of the key reasons for the decline is the additional property cooling measures announced by the government in early-July this year. But, I think that all hope is not lost with APAC Realty’s business. Here are three reasons why.
Property acquisition near HDB Hub
Last month, APAC Realty completed the purchase of a commercial property located at 450 Lorong 6 Toa Payoh, Singapore, for S$72.8 million. The property is located near the Housing and Development Board’s central office, called the HDB Hub. With APAC Realty having substantial brokerage transactions involving public housing, the building’s proximity to the HDB Hub is beneficial for the company.
The new building will serve as a permanent place of business for APAC Realty. It will include new office space for agents, and better training areas. The property is also part of the company’s expansion strategy.
Jack Chua, the chief executive of APAC Realty, said the following during the company’s announcement of the acquisition:
“With the new space, we are able to support the expansion of the Group’s real estate agency business in Singapore as well as Asia Pacific. The new Property will also serve as the headquarters of ERA Asia Pacific. We are excited to be able to hold our regional meetings and providing training to ERA agents from across the Asia-Pacific region, including Indonesia, Japan, Korea, Malaysia, Taiwan, Thailand, Vietnam and Cambodia at the new offices.”
Around 50% of the property, comprising the first and second levels, will be leased to third parties, generating rental income for APAC Realty. Income generated from renting to third parties and ERA agents is expected to offset the operating costs of the building.
Strong track record of performance
APAC Realty has been performing well in terms of its financials.
From 2014 to 2017, the company’s top-line had grown at a compounded annual rate of 22.4% to S$400.6 million. Its bottom-line had done even better, rising by 28.5% per year to S$25.9 million. APAC Realty has also been generating copious amounts of free cash flow. In 2017, free cash flow climbed to S$34.2 million, up 52% from S$22.5 million in 2016.
As of 30 June 2018, the company had S$61.7 million in cash and no debt. Even though APAC Realty’s business might see some negative impact from the new property cooling measures in the future, the company’s strong balance sheet should allow it to see through any tough times.
At Friday’s close, APAC Realty’s share price was S$0.55. This translates to a price-to-earnings (PE) ratio of around 7 and a dividend yield of 7.3%.
In comparison, APAC Realty’s listed competitor, PropNex Ltd (SGX: OYY), had a higher PE ratio of 10 on the same day. For further perspective, the SPDR STI ETF (SGX: ES3), an exchange-traded fund (ETF) which can be taken as a proxy for the Straits Times Index (SGX: ^STI), had a PE ratio of 11.1 and a distribution yield of 3.5% on Friday.
Taking the above into consideration, it looks to me like APAC Realty is undervalued.
The Foolish takeaway
The additional property cooling measures have taken a massive toll on APAC Realty’s share price. However, the government’s intention with the cooling measures is to ensure that the property market grows in line with Singapore’s economic fundamentals, and not ahead of wage increases. As such, APAC Realty should at least perform on par with the growth in the Singapore property market.
On top of Singapore, the company has its tentacles spread overseas. Coupled with a low valuation, APAC Realty could outperform the Singapore stock market in the long-term.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P owns shares in APAC Realty Ltd.