SI Research: APAC Realty – Overlooked Stock For Property Boom

The enbloc fever has yet to fizzle out leading into the second half of 2018. In the first week of June alone, another slew of properties have been reported to be up for collective sale. The properties– Spanish Village, Katong Plaza, Gilstead Court and Elizabeth Towers – are collectively asking for a total of $1.8 billion.

Local investors are no strangers to Singapore’s land scarce property market. As enbloc activities ramped up since the start of this year, investors were also quick to jump on stocks of reputable developers the likes of City Developments and UOL Group. But as investors piled in on developers in Singapore, they left behind some overlooked counters that could also ride along the property upcycle.

Amongst this group of “obscure” counters, APAC Realty stands out as it could be said to be one of the best proxies to our residential market recovery. After all, developers will be competing by launching a pipeline of projects and these projects will need agencies to market and sell.

Riding On Market Dominance And Industry Tailwind

Being one of the largest local real estate brokerages, and the only one listed here, APAC Realty’s dominance encapsulates the potential rewards of the rise in transaction volume as well as value here. In terms transaction value, the group’s real estate services brand ERA Realty – a household name – is estimated to hold a market share of about 38 percent in Singapore’s residential property market.

ERA Realty has a sizeable agent base of 6,053 agents registered (as at 22 March 2018) and this allows the agency to capture a diverse base of potential property buyers. Correspondingly, it is also why developers are more willing to award ERA Realty the agent role for new launches. In its ongoing pipeline, ERA Realty has more than 11,000 residential units that stretch across more than 20 new project launches till 3Q18. The secured units are more than double of that secured in 2017.

Notwithstanding that, the increasing numbers of redevelopments of enbloc sites will further add a significant number of housing units to the existing supply. Coupled with stronger buying momentum, this dynamic will be driving the earnings for real estate brokerages. According to the Urban Redevelopment Authority, there is a potential supply of up to 20,100 potential units, comprising 13,200 from of enbloc sale sites and the remaining 6,900 available parcels on Government land sales. A large part of this new supply will be made available for sale in the later part of this year till next year, and will be completed by 2021 onwards.

1Q18 Performance A Prequel

APAC Realty’s 1Q18 result is a prequel to expecting another record performance year. Already, total revenue increased 56.7 percent to $105.2 million. Its real estate brokerage and related services business that forms the bulk of revenue saw contributions expand 57.3 percent to $103.7 million. Other revenue comprising merchandise sales, training course fees, property consultancy fees, rental income and interest income contributed the remainder of $1.5million.

In tandem with higher brokering services rendered, cost of services (mainly commission split with agents) rose 62 percent to $92.3 million. Total operating costs rose marginally by 6.2 percent to $5.8 million, mainly due to increase in headcounts to support higher business volumes.

Margin-wise, APAC Realty saw some contraction in gross margin from 15.1 percent to 12.2 percent. This could be due to higher commission split made to agents given the upturn in property market sentiments and hence should not be a big concern for investors. Nevertheless, strong top line growth still drove earnings up by 46.8 percent to $5.9 million.

In the next few quarters, underpinned by more-than-double units secured for new projects launches for FY18, successful sell-through rates for these various projects will drive earnings for APAC Realty. That is notwithstanding the rising transaction prices as well as new supply of properties that could still add to APAC Realty’s existing pipeline.

Consider the scenario that APAC Realty executes sales for 15,000 units at an average of $1.8 million per unit: Assuming APAC Realty charges a brokerage commission of 1 percent, the group would generate about $270 million in brokerage fees from new units itself. This is not inclusive of any brokerage fees APAC Realty would receive as the appointed marketing agent for various collective sales. Since 2017, APAC Realty marketed and sold $571.6 million worth of sites when the property market is just at the cusp of recovery.

Decent Yield, Undemanding Valuation

Despite an improved set of results, APAC Realty’s stock performance has underperformed the broader market. After climbing to a 52-week high of $1.26 in March2018, its stock began to tumble before stabilising at $0.89 currently which is about the level during the start of the year.

Regardless, APAC Realty is now trading at an undemanding trailing 12-month price-to-earnings (PE) of 12.2 times only. The group distributed a dividend of $0.02 per share for FY17, which translates to a payout ratio of about 27 percent and a decent dividend yield of 2.2 percent. As the outlook for our property market continues to grow brighter, investors could see APAC Realty raising its dividend payout to make its stock even more attractive.

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