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.

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