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UOB Kay Hian upgrades PropNex to 'buy' on robust Singapore property market

Felicia Tan
Felicia Tan10/6/2021 12:43 PM GMT+08  • 4 min read
UOB Kay Hian upgrades PropNex to 'buy' on robust Singapore property market
Despite the upgrade, UOB Kay Hian has reduced PropNex’s target price estimate to $1.97 from $2.09 previously.
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UOB Kay Hian has upgraded PropNex to “buy” from “hold” as the Singapore property market continues to remain robust.

This is an about-turn from the brokerage’s downgrade in August 2021 as it deemed PropNex’s performance for the 1HFY2021 ended June “tough to repeat”.

Following the announcement of PropNex’s strong results for the 1HFY2021, the company has seen a 14% retracement in its share price.

According to UOB Kay Hian analyst Adrian Loh, the lower share price may be attributable to profit-taking after a strong share price performance year-to-date (y-t-d) with the stock having risen 116.7% and substantially outperforming the Straits Times Index’s (STI) increase of 10.8% over the same period.

Loh has, however, reduced PropNex’s target price estimate to $1.97 from $2.09 previously.

See: PhillipCapital downgrades PropNex on recent share price rally, which has already priced in positives

The new price-to-earnings (P/E)-based target price is due to the brokerage rolling forward its valuation year to FY2022 versus the previous aggregate of 2021 and 2022.

“In addition, we have elected to lower our target P/E multiple from 12.5 times to 11.1 times with the latter being +1.5 standard deviation (s.d.) above the company’s historical average of 6.6 times (and the former being +2.0 s.d),” writes Loh in an Oct 6 report.

“We believe that the lower P/E multiple is reasonable as it takes into account the potential earnings decline that we have factored in for 2022,” Loh adds.

That said, Loh believes that the company’s fundamentals, valuation multiples and net cash position “now warrant a more bullish stance”.

While 2021 could be the peak in PropNex’s earnings, Loh sees that there is upside to its share price.

Currently, the company is trading at an “undemanding” FY2022 P/E of 11.8 times EV/EBITDA of 6.9 times with a prospective yield of 6.5%.

“In the short term, continued bullish newsflow on transaction volumes, en blocs or property pricing could be share price catalysts,” he says.

Furthermore, there is still “a lot to like” about PropNex.

The company’s return on equity (ROE) nearly doubled to 16.3% in the 1HFY2021 from 8.6% in the 1HFY2020 while remaining in a net cash position of around $120.7 million, or 33 cents per share as at end-1HFY2021.

The company also generated $19.2 million in free cash flow in 1HFY2021, which is a 59% y-o-y increase from the $12.1 million in the 1HFY2020.

Looking ahead, Loh believes that PropNex should continue to report a strong showing in its 3QFY2021 business update.

“Given the time lag between property transactions and actual recognition of revenues and profits, we expect Propnex to continue generating strong results into at least 1QFY2022. Note that as of 1HFY2021, the company has moved to half yearly reporting of its financial results,” he says.

Loh has also forecast that PropNex will maintain its FY2020 payout ratio of 70% of earnings for the FY2021 to FY2023, which translates to a full-year dividend of 12 cents per share.

To this end, he does not expect cooling measures from the Singapore government in the near term given that the total debt servicing ratio has suppressed a significant amount of residential property market speculation in Singapore.

In addition, comments made by Ravi Menon, managing director at the Monetary Authority of Singapore (MAS) in June 2021, indicate that the central bank does not believe that the property market is overheated.

Loh also highlights that the 0.8% q-o-q increase in Singapore home prices in 3Q2021 is “too low” for the government to implement any cooling measures.

The decline in inventories of unsold private homes for 10 straight quarters as at 2Q2021 presents PropNex with opportunities as well.

“The industry’s inventory-to-sales ratio is at a four-year low of 1.5 years, which could be ameliorated by more aggressive government land sales or en bloc approvals. On the latter issue, PropNex disclosed that it has set up a new en bloc sales team that has garnered $4.4 billion of projects in hand. This could underpin the company’s earnings growth in the next 12-18 months, which we have not factored in at present,” writes Loh.

There is also a strong resale market for private and HDB units, which is a plus for the company.

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Finally, Loh has upgraded his earnings estimates for the FY2021, FY2022 and FY2023 by 10%, 13% and 7% respectively.

“These upgrades stem from our greater confidence in the Singapore property market overall with slightly higher volume assumptions for private and HDB sales as well as a moderate increase in profit margins for the company’s main business segments.”

As at 12.42pm, shares in PropNex are trading 3 cents higher or 1.78% up at $1.72, with an FY2021 P/B of 6.0 times and dividend yield of 7.1%.

Photo: Samuel Isaac Chua/The Edge Singapore

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