An opportune time for a PropNex listing

PROBABLY in a few months' time, equity investors will have more options to ride the upswing in Singapore's residential market besides developer stocks and APAC Realty, which owns Singapore's second-largest property agency ERA Realty.

PropNex Realty, Singapore's largest homegrown property agency, is preparing for a public listing on Singapore's mainboard in the third quarter of this year. It is already talking to potential cornerstone investors, but has not obtained eligibility-to-list from the Singapore Exchange yet.

The last time PropNex Realty sought to undertake a public listing was believed to be around 2010-2011 after it switched its auditors to KPMG, a big four audit firm. But the plan was placed on the back-burner following a series of property cooling measures.

Now, things are looking up despite all cooling measures still firmly in place. There is broad consensus that the residential market has legs to run for at least two years. It would hence make sense for PropNex Realty to seek a public listing now.

Continued pent-up buying demand has already enabled developers to sell more than they have launched so far this year, with the speed of launches and private home price growth likely to accelerate in the second half of this year.

The largest agencies here are hence in a strong position to benefit from the ongoing boom in residential sales given their dominant market share of property transactions and project marketing jobs from developers. PropNex Realty, which has 7,208 agents, and ERA Realty, which has 6,105 agents, have each secured around 20 project marketing jobs from developers this year.

Earnings visibility

Property agencies thrive on transactions. The large launch pipeline from collective sale sites and government land sale sites sold offers earnings visibility for PropNex for the next two years. Last year, PropNex Realty's after-tax profit of S$8.7 million more than doubled from S$4.17 million in 2016 on the back of a 47 per cent surge in revenue to S$341.32 million.

Its agents clocked more than 56,000 transactions last year, after factoring in Dennis Wee Group (DWG)'s contribution for the last four months of 2017, up from 46,229 in 2016. PropNex merged with DWG last year. From 2013 to 2017, PropNex Realty enjoyed a compounded annual growth of 17 per cent in net profit.

The earnings of APAC Realty, which was listed last September, have evidently been buoyed by market recovery too. Investors have piled into the stock, causing its share price to surge as much as 94 per cent from its IPO price of 66 cents. But since March, APAC Realty's share price has been correcting from a high of S$1.28, prompting speculation that institutional investors may be seeking a rotational shift into PropNex Realty when it is listed.

For investors looking to buy into such stocks, they should be aware of the cyclical nature of the property agency business. While the near-term market outlook is positive, whether it can be sustained over the longer term remains uncertain, with policy risks lurking in the horizon. Potential external economic shocks can also turn the tide.

The continued success of property agencies also hinges on their ability to retain and recruit agents, and their ability to stay relevant and competitive in the face of technological disruptions.

There is already a rising trend of "DIY" (do it yourself) transactions, facilitated by property portals. In the HDB resale market, the DIY rate has grown from 11 per cent in 2010 to 28 per cent in 2017. It remains to be seen if the government's push towards fully digitalised and seamless property transactions will further entrench this DIY movement. Agencies will have to look at tapping technology and innovating to add value to their clients' experiences.

Their constant need to retain agents with incentive schemes and to stay abreast of technology will add pressure to their already thin gross margins. In this low-margin business, agents typically take home 70 to 90 per cent of the commissions.

But so far, PropNex Realty has demonstrated a track record of profitability across property market cycles. Formed from a merger of agencies in 2000, PropNex has grown steadily under the leadership of its gumptious CEO Ismail Gafoor, who owns 62 per cent of P&N Holdings, the parent firm of PropNex. As the flagship subsidiary of P&N Holdings, PropNex Realty makes up 70-80 per cent of P&N's earnings.

Size matters

In an industry where size matters, PropNex Realty has benefited from a consolidation sweeping the industry. In 2014, it took over sales associates from JLL when the latter acquired a 20 per cent stake in PropNex's project marketing arm PropNex International. A bigger milestone for PropNex Realty came last year when it merged with DWG - a move that added more than 800 agents to PropNex Realty and lifted it to top position in terms of number of agents. Outside of Singapore, PropNex has launched a regional franchise, starting with Indonesia and Malaysia.

With the IPO proceeds, PropNex will probably be able to expand its range of services and geographical presence in the Asia-Pacific region more aggressively. Plans are afoot to extend its regional franchise.

It would be better for PropNex to list soon lest it has to conduct a further audit of its books for the first six months of this year. It also makes sense for it to tap the bullish sentiment in the residential market soon before the party is over.