3Q21: As Expected, A Strong Set Of Results
Propnex’s 3Q21 net profit more than doubled yoy to S$15.5m while on a 9M21 basis, its net profit made up 77% of our full-year estimate. The Singapore property market remains robust and in the next 6-12 months, earnings surprise could come from successful enbloc projects. With over 10,000 agents and growing, Propnex’s revenue base appears very robust going forward. Maintain BUY. Target price upgraded to S$2.17 (previously $1.97).
• A strong set of results as expected. Propnex reported a strong set of 3Q21 numbers with revenue doubling yoy to S$234m while net profit more than doubled to yoy to S$15.5m. This was the result of a higher number of transactions completed in 3Q21 following improvements in Singapore’s COVID-19 situation and an improving economy. In particular, we highlight that the strong results were generated by the company’s three key market segments, ie new launches, private resale and HDB resale, which all saw strong yoy growths. Its 9M21 net profit of S$49.8m accounted for 77% of our full-year 2021 forecasts, which we deem as largely in line with our expectations.
• A new and higher base of earnings. The company highlighted its confidence in being able to maintain a revenue base of S$200m per quarter going forwards given its high market share and material advantage in numbers in terms of property agents. Propnex stated that with >50% of the HDB resale market share, it will be able to continue building on this as a driver of its earnings base. In addition, the company is targeting to increase its total number of agents to 12,000 by 2023.
• A larger salesforce is not leading to margin erosion. While there had been some market concerns that Propnex’s grab for market share by employing more salespeople could lead to margin erosion, 3Q21 did not bear this out with pre-tax and net profit
margins expanding by 1.1ppt and 0.6ppt respectively. As at end-3Q21, the company had around 10,300 property agents, and this should drive transaction volume in 2022 on our estimates.
• No cooling measures in the near term. Revisiting a topic that is on the top of the minds of Singapore investors, Propnex reiterated that it does not believe that cooling measures are on the horizon, and that the current slate of property buyers in Singapore are not speculators but instead buying for their own use or as a store of long-term wealth. We also highlight that
the 0.8% qoq increase in 3Q21 Singapore home prices appears to be too low for the government to implement any cooling measures.
• Continued decline in inventories of unsold private homes presents Propnex with opportunities. Propnex highlighted that as at end-3Q21, unsold private homes have declined for 10 straight quarters with the most recent reading at just over 17,100. As a result, the industry’s inventory-to-sales ratio is at a four-year low of 1.67 years for the Rest of Core Region, and 0.77 years for Outside Core Region (OCR). Hence, the company believes that its enbloc projects in the OCR will have very significant interest from buyers.
• Upside to enbloc projects. At present, Propnex has c.S$4.4b of projects in hand which could underpin the company’s earnings growth for the next 12-18 months. Assuming a 0.3- 0.4% commission, this could add S$13m-18m in earnings over the next 12-18 months as the gestation period for enbloc projects may not result in all the earnings accruing in 2022.
• Look for higher dividends. During the analyst call, management guided again for higher payout for its final dividend for 2021, stating that it “aims to pay out 75-80% of its 2021 profits to shareholders”. Our estimated payout for 2021 remains at a resasonably
conservative level of 70%.
• Strong cashflow generation and returns. In 3Q21, its free cash flow jumped nearly 150% yoy to just under S$24m while ROE materially increased to 13.4% in 3Q21 vs 8.2% in 3Q20.
• We maintain BUY on Propnex with an upgraded PE-based target price of S$2.17 (previously S$1.97) due to our greater confidence in the company’s prospects in 2022, barring any economic downturn. Our new target PE multiple of 12.6x is 2SD above the company’s historical PE average of 6.8x. Given the company’s huge cash pile of S$123.7m as at end-3Q21, equating to S$0.33/share, we note that its ex-cash PE is only 8.6x.
SHARE PRICE CATALYSTS
• Continued positive newsflow on private and HDB resale volumes.
• Moderation in quarterly price increases of the Private Property Price Index (PPPI).
• Anticipation of higher levels of dividends
• High level of conversion of its S$4.4b worth of enbloc projects currently in hand.