• U/G to BUY from Neutral with unchanged SGD0.42 TP (10% upside). APAC Realty’s share price has severely underperformed YTD (-26%) amid a significant slowdown in primary transaction volume, which is a key earnings driver. While 2024 earnings are expected to remain weak, we see a healthy pick-up in 2025 primary transaction volumes driving an earnings turnaround. Valuation is reasonably cheap at 10x FY25F P/E with a healthy 7% forward dividend yield and net cash position presenting limited downside risks.

• Three factors supporting primary volume recovery in 2025. We expect primary transaction volumes in 2025 to recover by c.50% or more (9,000- 9,500 units) on the back of: i) An increase in new launch supply (>10,000 units likely to be launched in 2025) which was pushed back in 2024 due to soft market conditions and delays in planning and approvals, ii) developers pricing projects attractively amid increased competition from new launches and also to avoid incurring punitive Additional Buyer’s Stamp Duty (ABSD), which kicks in if developers do not sell all the units within five years from land acquisition, and iii) a fall in interest rates making housing loans more affordable, leading to higher demand. The new home sales segment typically accounts for 40-60% of APAC’s gross profit. Private new home sales have been tepid in 2024 with August sales (excluding executive condominiums) of 208 units (-64% MoM, -47% YoY) representing a record low. YTD (August) volumes are down 49% YoY at 2,886 units, and full-year volumes are likely to fall short of our expectations of 6,000-6,500 units.

• Resale and rental markets to remain resilient. The slack in primary transaction volumes have been to some extent offset by private resale volumes which rose 18% YoY in 1H24. Housing and Development Board (HDB) resale volumes (1H24) also rose 7% YoY. It is worth noting that margins from this segment are low at 6-10%, typically half that of the primary market segment. We expect resale and rental market transactions to remain resilient in 2H24 and 2025. Its overall market share in primary and secondary market transactions have remained relatively stable at c.40%

• Overseas market contributions to see turnaround by 2025. The overseas segment has been loss-making so far due to start-up costs and weak market conditions particularly in ERA Vietnam. However, transaction activity and its scale is expected to pick up, and APAC expects overseas markets to start contributing positively to its bottom line from FY25 onwards.

• We tweaked our FY24-25F net profit by -2% and +3%. 1H24 net profit fell 19% YoY and we expect 2H24 earnings to be at a similar level. FY25 net profit is expected to rebound by c.50%, driven by higher-margin new home sales. Our TP includes a 0% ESG premium/discount.

Source: RHB Research - 19 Sep 2024