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Broker's take: PhillipCapital initiates coverage on PropNex, APAC Realty with 'buy'

PHILLIPCAPITAL has initiated coverage on real estate agencies PropNex and APAC Realty with "buy" recommendations and a target price of S$0.63 and S$0.65, respectively.

In a Monday report, PhillipCapital noted that both players have grown their foothold in the market in recent years on industry consolidation. The brokerage added that both agencies, which capture a combined 85 per cent of total market transactions, have a highly scalable and resilient model.

PropNex agents accounted for 13 per cent of property agents in 2012 and now account for 26 per cent. Meanwhile, APAC Realty, which operates under the ERA brand, has seen agent numbers grow from 15 per cent of property agents in 2012 to 23 per cent in 2019.

"The dominance of these two market players within the real estate brokerage market in Singapore allowed them to capture a substantial amount of transactions, be it in a buyers’ market or sellers’ market," the brokerage's analyst Tara Wong, said.

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Moreover, both agencies have continued to maintain high levels of return on equity (ROE) in recent years, with little to no leverage. In FY2018, PropNex's ROE stood at 31 per cent, while APAC Realty's was 17 per cent.

Ms Wong noted that the real estate brokerage business has the characteristics of being "asset-light, with most of the salesforce being paid on a variable basis, allowing both companies to easily maintain or grow their high ROE".

The agencies also remain resilient during industry downturns.

Both PropNex and APAC Realty were able to match or beat the movements of the property market each time, Ms Wong said.

"Aside from gaining market share and being a proxy to the Singapore residential market when volumes pick up, a key upside would be the pivoting towards overseas markets – by eventually owning and consolidating said operations, thus also diversifying the earnings base out of Singapore."

As at 11.16am, PropNex was trading two Singapore cents or 4 per cent lower at S$0.48, and APAC Realty shares were down one Singapore cent or 2 per cent at S$0.49.