Propnex A Value Play- Is Spore Property Prices Correcting? -

Propnex is trading at a PE of 11 and a dividend yield of 7.6%
They have the largest amount of agents in Singapore
Earnings have fallen by 18.8%
Propnex Price has dropped 32% from their peak
They have an impressive Return on Investment of 37%

Propnex has been a stock on our radar due to its great return on investment metric. Sadly, we have missed the good run that they had over the past 2 years. So with the recent correction in price, is it turning into a value play?

The stock market is a forward-looking proxy for the economy. Is the recent weakness in the price of Propnex an indication of a correction of Singapore Property Prices ahead?

We did an article on a likely property crisis in late 2022, and we still hold to the view that our thesis is valid.

We will dive into the different elements to hopefully unearth some useful insights. More importantly, we would like to know if Propnex at its current level is an investment worth considering.

Property Price Trend- Singapore

Source: tradingeconomics.com

Let us first have a look at the property price trend in Singapore to have a better feel of the general direction. Looking at the URA Property Index which has done a coverage of private home prices, we are still seeing an uptick in the prices.

There was a slight decrease in 2023Q2 but for 2023Q3, the prices reverted back to their uptrend.

Looking through the charts from 2000, there were 3 evident corrections for the Singapore Property Market. They are in the early 2000s (9/11 and Sars), 2008 (Global Financial Crisis) and 2014 (Euro Crisis).

Source: HDB

The HDB (Public Housing) Price Index is showing an even stronger upward trajectory. There was no drop in prices for 2023Q2.

In essence, Singapore property prices are still in unchartered territories by reaching new highs. Even with the upsurge in interest rates, the government’s restrictive policies (literally at 60% taxes for foreigners to buy a property- it has killed the interest of this segment), and big tech layoffs, the property market has remained resilient.

Overseas Property Prices

Source: Goldman Sachs Research

Singapore property prices seem to be the outlier with continual strength. As we can see from the charts above, property prices have been drifting down in many other countries.

Perhaps, it was due to the money laundering case in Singapore that has seen 2.8 billion dollars of ill-gotten gains coming into the system. The choice of deployment has been the luxury properties amounting to 152 properties.

The impact from this case would be hard to gauge but it is reasonable to speculate that huge negotiations on prices would not be a top priority. Hence, the support of elevated prices could be just a mirage.

Source: ceicdata.com- China Property Price Index

Following our article on Country Garden, the state of the China property market is also not promising with the chart above telling us prices in China are coming down just like many other countries.

Even Hong Kong property prices are also following the cue from China. Hong Kong is known to have resilient and sky-high property prices, they are giving way to economic realities.

Therefore, we have the view that a further huge upsurge in Singapore’s property prices would be a tall order based on the data that we have gathered.

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Number of Agents In Singapore

Source: Council for Estate Agencies

We took a look at the number of property agents in Singapore to have a gauge of the property environment.

We could see that there was a surge in agents from 30k to 34k from 2021 to 2023. The numbers were 28k to 29k from 2018 to 2020. The last time the number was 30k was in 2012.

A reason for the recent surge could be the lucrative commissions that agents have been earning during the past few years. The developers have been generous with their commission by offering 3%-5% for new sales- (so 30k to 50k for a unit sold in commissions). The usual rate like a decade ago was around 1%.

The social media clips of agents driving supercars could have aided in the influx. This gives the impression that it is really easy to earn big bucks being a property agent.

The frenzy could be fizzling off as it seems the market conditions could be tougher. One of the property agents active in TikTok is mentioning that even the Property Lim Brothers is now seeking co-broking arrangements.

In a good market, realtors would rather get a direct buyer (Not represented by any agent), so they do not have to share their commissions in a co-broking deal.

From the table above, Propnex is the market leader in the Singapore market as they clinch the top spot in terms of the number of agents.

Propnex Financial Ratios

Stock	Propnex	Apac Realty (ERA)
Price Earnings (Forward)	11.2	12.5
Price Book	5.4	1.2
Price Sales	0.7	0.3
Debt to Equity	NA	29.5%
Return on Investment	37%	9%
Current Ratio	1.6	0.9
Dividend Yield	7.6%	7.4%
Price/Market Cap	$0.85/ $630 million	$0.51/ $181 million

Source: Reuters

Taking a look at the real estate agency stocks, it seems really attractive. Trading at PE of low teens, with manageable debt and good financial strength, more importantly, their dividend yield is impressive.

Propnex stands out with its return on investment of 37% as compared to Apac’s 9%. This means Propnex is the better capital allocator where they are getting more bang for their investment in the business.

A possible reason for that is that the higher management of Propnex has skin in the game. Mohamed Ismail has a 43% stake (Direct and Indirect through P&N Holdings) and Kelvin Fong has a 9% stake. The CEO of Apac Realty does not even have a 0.3% ($550k) stake based on the records on the Moomoo platform.

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From a price-to-book angle, Apac seems the more reasonably priced candidate. However, after looking through the financials, Apac has $106 million dollars worth of intangible assets. That forms two-thirds of their book value. This could consist of their branding, software investments etc.

On the contrary, Propnex have only $454k recorded for this entry. So if we take away $106 million from the books of APAC, their PB ratio will increase to 3 from their current 1.

As mentioned earlier, Propnex’s dividend is also really attractive at 7.6% (factoring in their 1 for 1 bonus issue).

Is it sustainable?

They have no debt and have cash holdings of $139 million (Apac have net cash after debt of just $4 million). The dividend based on 7.5%, will come close to $48 million dollars. So if the business maintains profitable, cashflow positive, the dividends are likely sustainable for the next year or two.

Propnex Earnings Are Falling

In their latest results announcement, Propnex saw a fall of 23% in revenue and an 18.8% drop in profits for HY2023. Apac Realty fared worse with a 24% fall in revenue but a whopping 73.8% drop in profits.

It looks like Propnex has a better ability to rein in costs in a down market.

Based on some facts highlighted in their results briefing:

The Group, however, remains optimistic for a stronger second half of 2023 (“2H2023”) as it anticipates the private homes market to pick up on the back of a large pipeline of new launches. It estimates another 33 new launches with an aggregated 8,000 units to hit the market in 2H2023. For the full year 2023, approximately 11,5291 new units to be launched, which is more than double the 4,528 units that were launched in 2022.

First and foremost, for 1H2023, there were around 4,000 units launched which is comparable with the total units launched in 2022 of 4,528 units. Our interpretation of the outlook is different from Propnex’s optimistic tone.

From the figures, it means that the takeup rate for new launches is not really favourable in 2023 as compared to 2022, which saw Propnex revenue falling for 1H2023.

With a further influx that is almost double the size of units for the whole of 2022, the market could be in an oversupply situation.

The market is already not able to digest 4,000 units, with another 8,000 units coming in on 2H2023, the signs of a price correction from the record highs are on the walls.

Also, during a recent friendly banter with a friend in the developer business, he mentioned that it is fortunate for developers to break even in this current environment. With escalated construction costs, financing costs and lucrative commissions to the agents, it has deeply eaten into a developer’s profit margin.

Propnex Growth Plans

Could Propnex replicate its Singapore success model regionally to add new catalysts for sustainable growth ahead?

Source: Propnex Corporate Website

Looking at the infographic above, we can see that Propnex has been gradually setting up their presence regionally. They have been entering a foreign market every year since 2016. They have a presence in 5 other countries excluding Singapore.

They currently have 12,000 agents in Singapore and 3,000 agents overseas.

There is no breakdown of revenue of overseas contribution to the revenue. So we are not able to ascertain the potential contribution from the overseas operations.

Nonetheless, if they are able to replicate Singapore’s success in their operations overseas after navigating the different landscape, it would have a good runway for sustainable growth ahead.

Technical Analysis

The charts are not forming a base and there could be likely further downside. Potential targets for the short to medium term would be the next 2 strong supports at 0.75 and 0.66.

With property prices still holding well, it would be interesting to see how 2024 will unfold. With the massive influx of new launch units, will Singapore’s property prices scale new highs? Or it will be realistic for them to have a correction in prices which is in line with other developed countries’ property market situations.

When prices start to correct, Propnex’s price could fall further as the prices have just turned the tide from bullish to bearish.

Summing Up

Propnex has fallen 32% from its peak. They have had a good run over the past couple of years where it has climbed from $0.4 to its peak at $2.5.

However, looking at the property market in Singapore, there could be price pressure with the influx of new launches in 2023 that is triple the size in 2022.

Singapore market is the outlier where regional and other developed countries have shown weakness in their property markets.

There are already signs showing a slowdown in the take-up rate of new launches. Propnex profit fell by 18.8% for the 1H23 despite more new launches in 2023.

Propnex have an impressive return on investment of 37% which could be due to the management holding huge stakes. Their dividend of 7.6% is also likely sustainable in the next year or two if market conditions do not drastically deteriorate. They have $139 million in cash holdings.

Looking at the charts, there seems to be more downside ahead. The 2 strong support levels will be at 0.75 and 0.66 respectively.

Our view is that the weakness in Propnex prices could be a leading indicator for Singapore’s Property Market. Be ready for a bumpy ride ahead.

Also Read: Likely Property Crisis for Singapore?- A 30% Correction

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Disclaimer:

The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.