Singapore's main real estate brokerages offer great value and defense, say analysts

SINGAPORE (June 7): Phillip Capital and CGS-CIMB Research are initiating positive coverage on both APAC Realty and PropNex, the two main market players within Singapore’s real estate brokerage sector.

In a Monday report, Phillip analyst Tara Wong says she likes both stocks for their market dominance within the real estate brokerage market in Singapore, which in turns allows to them to capture a substantial amount of transactions in both buyer and seller markets.

Wong has initiated coverage on APAC Realty and PropNex at “buy” with target prices of 65 cents and 63 cents, respectively.

Their asset-light businesses and variable salary models allow both companies to easily maintain or grow their high return-on-equity (ROE), she adds.

Further, the analyst believes both PropNex and APAC Realty have proven resilient even in the face of industry downturns, such as in the case of their 6% and 30% revenue growth, respectively, in 2018 despite an overall decline in private residential transactions.

“The real estate agencies’ model is highly scalable and resilient, especially with both APAC Realty and PropNex capturing an average c.85% of total market transactions. Aside from gaining market share and being a proxy to the Singapore residential market when volumes pick up, a key upside would be the pivoting towards overseas markets – by eventually owning and consolidating said operations, thus also diversifying the earnings base out of Singapore,” says Wong.

CGS-CIMB analyst Lock Mun Yee, on the other hand, prefers APAC Realty over PropNex for the former’s more attractive valuations although she has given both stocks an “add” rating with the respective target prices of 67 cents and 64 cents.

At the June 3 closing price of 49 cents for both APAC Realty and PropNex, the counters are valued at 8.5 times and 11 times FY20F P/E to offer dividend yields of 7.5% and 7.2%, respectively.

In a report on Tuesday, Lock says she believes property agencies are poised to benefit from expanding commission rates amid an increasingly competitive landscape due to new project launches scheduled for 2019-20F.

Coupled with volume recovery, this could result in as much as a double-boost to both companies’ topline growth, in her view.

Going forward, the analyst foresees earnings growth to be driven by organic revenue expansion from a low post-cooling measure in 2019F; expanding commission rates; bumper new private residential launches; projected transaction volume recovery; as well as inorganic growth from increased agent share via mergers and strategic alliances.

“Our proprietary study showed that proptech platforms are enablers, not disruptors… Key catalysts for the sector include an improvement in residential transaction volumes, while a downside risk would be a compression in commission rates,” says Lock, who maintains her sector “overweight”.

As at 3:02pm, shares in APAC Realty and PropNex are trading at 52 cents and 51 cents, respectively, or 1.19 and 2.56 times Dec-20F book value, respectively.