The mystery of PropNex’s share price surge

IT IS probably a mistake to bet against the resilience of Singapore’s residential property sector – even in the wake of an unexpected round of cooling measures. But the remarkable buoyancy of PropNex’s share price might prove to be a short-lived anomaly.

On Thursday (Apr 27) – the first trading day after the government announced further hikes in Additional Buyer’s Stamp Duty (ABSD) – PropNex closed at S$2.01, down more than 6.5 per cent versus the previous day’s close of S$2.15.

On Friday, when PropNex began trading ex for its final dividend of S$0.08 per share and a one-for-one bonus issue, the stock closed at S$1.25. This was 29.5 per cent above the previous day’s price, after adjusting for the dividend and bonus issue.

It was also 20.8 per cent above PropNex’s adjusted closing price on Wednesday, before the cooling measures were announced.

One explanation for this surprising strength in PropNex’s share price is that there is some confusion in the market, caused by the ex-bonus date coming right after the latest ABSD hikes.

Another explanation is that investors are simply excited about the outlook for PropNex in spite of the latest ABSD hikes. Indeed, PropNex climbed steadily through the Friday trading session on elevated volumes. Its closing price of S$1.25 was the high for the day.

Statement of confidence

PropNex itself does not seem too worried about the most recent ABSD hike having an adverse impact on its business. On Apr 27, the company pointed out that foreigners – who have suffered a doubling in ABSD to 60 per cent – accounted for only 4.4 per cent of private home sales in 2022.

Singaporeans and permanent residents (PRs), who accounted for 95 per cent of private home sales in 2022, were hit with smaller increases in ABSD. Singaporeans buying their second residential property will now pay an ABSD of 20 per cent, up from 17 per cent. PRs buying their second residential property will now pay 30 per cent, versus 25 previously.

Singaporeans buying their first home still pay no ABSD, while the ABSD for PRs purchasing their first residential property remains at 5 per cent.

PropNex went on to say that it has a diversified revenue base, with significant exposure to the rental, Housing and Development Board (HDB) flat resale, landed, commercial and industrial sectors – which it does not expect to be significantly affected by the latest ABSD hikes.

“Such revenue segments account for close to 40 per cent of our revenue for FY2022,” PropNex said.

Successive rounds of cooling

PropNex may be justified in shrugging off the latest ABSD hikes.

Shares in the company began trading in the local market on Jul 2, 2018, following an initial public offering at S$0.65 per share (not adjusted for the bonus issue).

Four days later – on Jul 6, 2018 – the government unleashed a round of cooling measures that included ABSD hikes and tighter borrowing limits.

Not surprisingly, shares in PropNex promptly sank below their initial public offering (IPO) price.

The government introduced yet another round of ABSD hikes and further tightening of borrowing limits on Dec 16, 2021.

On Sep 30, 2022, borrowing limits were tightened again. In addition, the government imposed a wait-out period of 15 months on private property sellers before they are allowed to buy a resale HDB flat.

These successive rounds of cooling measures did not have a lasting effect on PropNex’s financial performance, though. With a steadily expanding sales force, PropNex’s revenue has more than doubled since 2018 while its earnings have more than trebled.

Big returns, no debt

For FY2022, PropNex reported a 3.9 per cent increase in earnings to S$62.4 million on a 7.5 per cent rise in revenue to S$1,029.2 million. The company ended FY2022 with S$138.9 million of cash on its books and no debt.

Since the end of 2018, shares in PropNex have delivered a total return of 618.1 per cent (with dividends reinvested). Its smaller peer Apac Realty returned 100.7 per cent over the same period, while the Straits Times Index returned 26.3 per cent.

At its closing price on Friday, PropNex had a market capitalisation of S$925 million or about 14.8 times its FY2022 earnings. Based on PropNex’s total bonus-adjusted dividends of S$0.0675 for FY2022, the stock offers a dividend yield of 5.4 per cent.

Still, the surprising strength in PropNex shares since they began trading ex-bonus last week should probably give investors pause. Even if the latest ABSD hikes ultimately have no effect on the company’s long-term financial performance, the surge in its bonus-adjusted share price seems hard to justify.

It is also worth keeping in mind that after the 2018 cooling measures knocked PropNex below its IPO price, it remained underwater until late 2020. Chasing an elevated stock can be risky even if it is underpinned by solid long-term fundamentals.

So, what does all this mean? As the Singapore Exchange often says, investors should trade with caution.