Review of APAC Realty Limited

APAC realty

APAC Realty is one of the leading players in the real estate brokerage industry in Asia. APAC Realty operates three main business segments – the real estate brokerage services; franchise agreements; and training, valuation and other ancillary services.

In this post, I share more about the business model, recent developments related to the company and my views on the stock.

Basic information

APAC realty share price

APAC Realty traded at S$0.89 as of 8 June 2018.

The peak was at S$1.26 on 9 Mar 2018 and was priced at S$0.78 during IPO on 29 Sept 2017.

The present share price is 14% higher than IPO and 29% lower than its peak.

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How does APAC Realty earn money?

There are 5 ways APAC Realty earns their revenue, according to their IPO prospectus.

  1. Primary project launches where developers pay the company project commissions for selling the developer’s properties
  2. Sellers paying commission to agents, who then have to give APAC Realty a cut for each successful sale & purchase transaction made by the agent on behalf of the seller
  3. Landlords paying commission to agents, who then have to give APAC Realty a cut for each successful leasing transaction.
  4. Commissions and incentive fees from sellers/agents/banks
  5. ERA sub-franchisees paying Royalties to APAC realty. The ERA brands and certain ERA marks has been licensed to sub-franchisees in Japan, Korea, Taiwan, Thailand, Malaysia, Vietnam and Indonesia and to the subsidiary ERA Singapore in Singapore APAC Realty holds the ERA Regional master franchise from Realogy for an initial term of 30 years, expiring in 2029, and is renewable for further terms of 30 years subject to certain conditions. APAC Realty also holds the master franchise rights for Singapore for Coldwell banker. Ancillary businesses such as training, valuation, property management, corporate sales, loan referrals, rental income and auctions

ERA is the second largest property agency as at 1 Jan 2018

According to CEA, ERA has the second most number of agents at 5,882, as at 1 Jan 2018.

This is more than many of the other agencies such as OrangeTee & Tie, Huttons Asia, KF Property Network etc.

Only Propnex Realty with 6,684 agents is larger than ERA.

10 largest property agencies singaporeHaving many agents confers benefits to ERA, in that the company has the resources to convince developers to engage them to market their new developments.

In addition, the size and scale mean that a majority of property transactions would be done through an ERA agent, and the resulting commissions is a source of revenue to APAC Realty.

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APAC Realty’s net profit is closely tied to Singapore’s property market

It is no surprise that APAC Realty’s net profit is closely tied to the health of Singapore’s property market, given its breadth of operations in the country.

The following chart shows how the net profit of APAC Realty as a group moves in tandem with the private residential price index, according to the IPO prospectus.

After the global financial crisis, a pick up in the price index was accompanied by an improvement in the group’s net profit from S$116.4m in 2008 to a peak of S$153.2m in 2013.

Subsequently, the enactment of the Total Debt Servicing Framework (TDSR) by the government resulted in a decline in net profit to S$137.2m as of 2016.
Net profit trend of APAC Realty
As an extension of the group’s net profit being closely tied to the health of Singapore’s property market, the brokerage function is the largest contributor to the group’s revenue.

In FY2016, brokerage income from resale and rental of properties contributed S$214m to total revenue of S$288m, or a proportion of 75%.

Brokerage income is indirectly linked to the number of salespersons with ERA, and how many deals those salesperson can transact in any given period.

Brokerage function revenue contribution of APAC realtySingapore operations contribute a substantial amount of revenue at S$287m in 2016.

Total revenue in 2016 was S$288m.

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Other countries such as Indonesia, Japan, Korea, Malaysia, Taiwan and Thailand contributed S$418,000 in FY 2016.

Singapore contribution to revenue APAC realty

ERA market share

In the IPO Prospectus, ERA’s market share is observed at 37.5% in 2016.

This is calculated as S$17.2b of transaction value done by ERA, divided by total market transaction value of S$45.8b.

Of the transaction value of S$17.2b executed in 2016, private secondary market residential transactions contributed the greatest at 35%, followed by HDB resale at 32%, private primary market residential transactions at 26% and residential leasing at 8%.

The numbers bear out the fact that ERA is a strong player in the private secondary market residential sector and HDB resale sector.

ERA market share transaction valueGoing forward, DBS forecasts that S$52.2b and S$57.4b worth of transaction value will be executed in the Singapore market in 2018 and 2019 respectively.

Using the 6 year average (2011 to 2016) market share of 29.6% would mean that ERA will be registering S$15.5b and S$17b worth of transactions in the following 2 years.

Agent disruption by technology

According to HDB, 27% of resale buyers and sellers went the do-it-yourself route with their HDB transactions in the first half of 2017.

This is an increase from 11% of buyers and sellers who went the DIY route in 2010.

The climb has been steady on the back of improved technology, widespread adoption of smartphones and an increasingly digitally literate population.

percentage of diy sellers and buyers from hdbThis trend does not look like it will be reversing anytime soon and will be a risk factor to APAC Realty.

The fact that more buyers and sellers go the DIY route means there will be no commissions paid to real estate salespeople, and accordingly none going to the agency, such as ERA.

However, consensus is that technology cannot entirely replace the salesperson and real estate agencies given the highly personalized requirement of real estate deals and the high price quantum of each transaction.

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Income seasonality

APAC realty income seasonalityAPAC Realty’s prices are driven by seasonality of rental and resale transactions with more transactions observed in second halves of the year.

This is seen in the historical performance from 2014 to 2016. Lesser transactions are observed during the Chinese New Year and year-end period.

The implication of seasonality would be lumpy on revenue and profit on the company’s income statement.

Greatly improved revenue figures for 1Q2018

In 1Q2018, total revenue recorded a big jump of due to an increase in the revenue from real estate brokerage fees and related services.

This was due mainly to increase in brokerage income from resale, new sale and rental of properties on the back of a more active Singapore property market.

Consequently, cost of services also rose sharply by 62% to S$92m, mainly as a result of increase in revenue.

1Q2018 Apac realty consolidate income statementBased on the financial statements, profit margin in 1Q2018 was 5.6% (S$5.9m of profit for the period / S$105m of total revenue).

The profit margin is not very high and the risk is that any uncontrolled increase in expenses will result in a negative margin.

PE ratio

Based on stock information from POEMS, the PE ratio of APAC Realty ranges from 10 to 11, based on trailing-twelve-month and historical measures respectively.

SGX stockfacts show that comparable companies have PE ratios of between 8.8 to 12.1, excluding outliers.

At a price of S$0.885, and PE ratio of 10.5 (average of 10 and 11), earnings would be 8.4 SG cents for the latest fiscal year, based on POEMS’ figures.

These companies include MYP Ltd, Hwa Hong Corporation, Centurion Corporation, Hatten Land, SLB Development, Singhaiyi Group, Hia Hoe Limited, Ying Li International Real Estate Limited, Aspen (Group) Holdings and World Class Global Limited.

APAC realty poems basic stock information

Using a PE target of 15x, based on DBS research, the target price would be S$1.26 (8.4 SG cents x 15).

No analyst can be so precise with target prices, and a target price range would be more meaningful. With a 10% band around the target price derived above, the price band would be between S$1.13 to S$1.39.

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NAV per share far below current share price

One thing that should give investors pause before purchasing the stock is the NAV which is far below current share price.

At an NAV of S$0.391 as of 31 Mar 2018, the share price of S$0.885 is at a premium of approximately 2.3x.

In terms of valuing this stock, NAV may not be the most appropriate as most of the assets on the balance sheet is in the form of intangible assets (S$100m) and trade receivables (S$71m), out of total assets of S$238m.

The NAV method for valuing businesses is best considered when the company holds significant tangible assets.

That said, the large difference between share price and NAV should give investors some pause.

I personally would want to find out what these intangible assets actually comprise of.

In the IPO prospectus, on page A-17, the make up of intangible assets is provided as follows

“Intangible assets comprise the ERA Regional Master franchise right for certain countries in the Asia Pacific Region, ERA Subfranchise right in Singapore and Coldwell Banker franchise right in Singapore arising from a business combination in 2013”.

As with any intangible asset, there is a risk of impairment, and this risk is spelt out in the prospectus.

For an investor, two key questions remain, “Do you want to be paying S$0.885 per share when the NAV of each share is S$0.391?”

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As an investor, do you still want to be paying S$0.885 per share when there may be a chance the intangible assets could be impaired in future?

As it stands, the IPO prospectus shows that intangible assets have been falling from S$103m in 2014, to S$102m in 2015 and S$101m in 2016.

Granted, the declines are not large enough to warrant significant concern, but the trend should be something to watch out for.

When there is an impairment of intangible assets, the will be a charge on the income statement, such that profit is reduced, possibly resulting in a reduction in dividends and downward pressure on the stock price.

Upside potential

Market talk has it that commissions are on the rise from 1% to 2-3% across the industry. This is a positive as it can lead to higher revenue for APAC Realty.

ERA has 2nd most number of sales people, giving it a size advantage that is difficult to replicate or overcome.

ERA also has very strong brand equity and many people in the market are familiar with its name.

Success of the company depends on how effective the salespersons are. In this regard, training for their salespeople should be a catalyst for more deals being closed, resulting in more commissions and revenue for the company.

With regards to the company’s latest acquisition of a 3 storey commercial property in Toa Payoh, space is rented out to agents, meaning there would be some cash generation from the asset, albeit from the company’s own salespeople.

An increase in HDB supply by the government suggests there will be an increasing number of transactions, resulting in commissions being recorded by salespeople and their agencies. ERA stands to benefit given their sizable salesperson base.

The company’s agreement with MLN Overseas (Singapore) to help Chinese clients manage their properties in Singapore, Thailand and Malaysia will constitute another source of revenue.

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Investment risks

There is talk that Propnex is preparing for an IPO, and that may investors away from APAC Realty, putting downward pressure on stock price.

Rising prices across the Singapore property market may lead buyers to stay out of the market, leading to lower commissions (assuming no change in commission rates paid by developers to salespeople) for salespeople and the agency.

Revenue of the company is very dependent on Singapore’s residential market performance, given its concentration in the domestic market.

The company’s dividend policy is uncertain, which is a risk for income oriented investors.

For growth investors, the large share price premium commanded over NAV is something to account for.

Technology and more DIY transactions may result in lesser commissions being done via salespeople, resulting in lesser commission paid to salespeople and the agency.

Intangible assets, which may be impaired, form a large proportion of total assets. Disclosures do not specify what exactly these intangible assets are and how they will be treated going forward.

Also read: The economics of DIY real estate platforms

REITs Asia Pacific 2018 conference

To get up to speed on how Asia Pacific markets are performing and to hear from experts in the field, the 5th edition of the REITs Asia Pacific 2018 conference is a perfect place to get started.

Register for the conference here with the code “PISREITS” to secure your seat now!

Organized specially for institutions such as banks, developers, funds, REITs, lawyers and government agencies, the conference will be held at Sheraton Towers Singapore on 2 Aug 2018.


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