Sunday 26 April 2020

APAC Realty: Better known as ERA

Say APAC realty and many people will not know what the company does; however if I were to say ERA, then everyone knows it is a property agency company.

To avoid further confusion, APAC realty is in fact ERA realty.

Business Profile of APAC Realty

APAC realty is one of the big 3 property agency in property crazy Singapore; the other being Propnex and OrangeTee. APAC has thelargest network of property agents in Singapore and are planning to expand in Vietnam, Indonesia and Malaysia

How APAC makes money is that it collects the commission for the property transactions, gives a cut to the property agent who did the transaction and uses the rest to finance its cost. Its a straightforward business.

APAC Realty revenue is greatly dependent on how many property transactions its agents make in a year. The more transaction, the greater the profits. And in a property crazy country like Singapore which has a lax immigration policy that encourages property demand and a "Chines culture" where property is a favoured way to store wealth, the property agency business will thrive (this statement may change should the government changes its immigration/housing policy stance).

Why It is Interesting

The industry is not capital intensive because it just needs property agents to do more deals to grow. Furthermore, its property agents are incentivised to do more deals because they themselves earn more commission (and in turn for APAC Realty). This is similar to many sales job like insurance agents, an industry that makes an insane amount of commission from consumers.

Throughout its year of listing, APAC realty has never encountered a year of negative free cash flow. And even during the GFC 2008, the company was profitable. This is because property transactions have to be made. What is more interesting is that despite HDB having their own e service transaction portals, a lot of property owners are still engaging agents to help them transact, instead of doing on their own and saving the 2% commission of their property value (2% of a 1 million property is $20,000 fyi).

All these shows how APAC and to an extent Propnex, another listed property agency company, are cash flow accreditive company. To me, it seems they will make a good dividend machine due to easy to scale up models with minimal CAPEX cash outflow.

Why APAC Realty over Propnex?

To me, its the relative valuation. This is the current valuation of APAC realty and Propnex as of now.

APAC realty P/E: 8.02
Propnex P/E: 8.80

Both are 5% dividend yielders at current prices and are paying well below their free cashflow. However do note their dividends fluctuate according to their market performances. When they make lesser property commissions on that year, APAC Realty reduces its dividends; this is in line with its 50% dividend payout ratio.

That said I am definitely interested in investing in a property agency company. The question is when, given that I am expecting a slowdown in property transactions. I am optimistic that the Singapore property market will improve in the medium term because it has to happen. Singapore's economy is built on the property market and a downturn in property market is a significant credit risk to our economy and thus the government will find ways to avoid it.

Given that APAC realty is still heavily concentrated in Singapore's property market despite its recent expansion, it will be a good proxy to the health of Singapore property market.

Friday 3 April 2020

Two Companies Doing Share Buybacks During the Covid Crisis

The Covid 19 Crisis has caused valuation of companies to plummet. For companies, it is an opportunity to back their own shares at low valuation to increase shareholders value.

However one downside of a share buyback is that it depletes your cash reserves, cash reserves act as buffer to protect you during a downturn. During this crisis, we have seen airlines and cruise operators suspend buybacks and dividends in order to preserve cash to survive. Many corporations such as HSBC and DBS has not done share buy backs consistently despite the low prices, in order to conserve their cash. 

To me, the fact that these 2 companies have been buying back shares daily shows they have excess cash reserve to protect their operations and at the same time, is using this opportunity to increase shareholder value.

The 2 Companies

Both are listed on the SGX- Silverlake Axis and China Sunsine Chemical

I have covered Silverlake Axis quite extensively, you can find it here. Basically, it is a software company which provides its core banking software to run its operations. As far as I know, it is providing services to OCBC, UOB, Malaysia Banks and some of Thailand Banks. Its competitor is Infosys; DBS is using Infosys's core banking software. Silverlake's Cash flow generation ability is exceptional

The other is China Sunsine who is the largest supplier to rubber tyre makers globally. As far as I can recall, about 50% of tyre makers raw materials come from China Sunsine. Again China Sunsine's Cash flow generation ability is exceptional.

Share Buyback

A picture says a thousand words just look at how frequent their share buybacks are!

 Silverlake Axis- Share buyback Since 10 March 2020

     China Sunsine- Share buyback Since 9 March 2020

Currently both companies have dividend yields above 5%. To me, I feel there is a margin of safety in investing in them now

<Author is Invested in Silverlake Axis>