APAC Realty Ltd (SGX: CLN) has seen its share price tumble more than 33% from its peak recorded in mid-2018. The real estate brokerage firm has suffered after the implementation of additional property cooling measures in July last year.
The group recorded a 26% drop in revenue, while earnings per share plunged 70% in the first quarter of 2019.
However, I feel the recent sell-down puts APAC shares in bargain territory for long-term investors. Here’s why.
Singapore property prices will rise over the long term
Despite the additional property cooling measures implemented last year, property prices should continue to trend upwards over the long term.
Ravi Menon, managing director of the Monetary Authority of Singapore, stressed that the government’s aim is not to depress property prices. Rather, it wants to ensure that price movements are consistent with economic fundamentals.
As such, I expect property prices will likely chug along as GDP (gross domestic product) and nominal wages increase.
The long-term trend of property prices also suggests that property prices do tend to trend upward. The chart below shows private residential property prices since 1975.
Singapore property transaction volume likely to increase
As a real estate brokerage company, APAC Realty’s revenue is also dependent on property transaction volume.
Developers have lined up more than 60 new project launches with over 20,000 units for 2019. This should help propel the number of new sale transactions this year. Displaced homeowners from last year’s flurry of en bloc sales are also going to be on the lookout to reinvest in the property market. On top of that, given the large supply coming on stream, developers are expected to offer higher commission rates for some of their older projects.
Over the long term, the total transaction will also likely trend upwards as the population and the number of properties in Singapore both increase.
Lastly, at current prices, APAC Realty’s share price looks to be below its intrinsic value. APAC Realty shares sport a trailing price-to-earnings ratio of 9.6. This is lower than the Straits Times Index’s price-to-earnings ratio of 12.
APAC Realty is also a cash generative and has a strong balance sheet. In 2017 and 2018, the group generated S$34 million and S$33 million of cash flow from operations before working capital changes. Its asset-light model also requires minimal capital expenditures.
I input an estimated future free cash flow of S$33 million, a conservative long-term growth rate of 2%, and a required rate of return of 10% into a discounted cash flow model. After deducting its net debt, the equity value of the company adds up to S$390.6 million. That compares favourably against APAC Realty’s current market capitalisation of S$193.6 million.
The Foolish bottom line
The market certainly does not like APAC Realty at the moment. Its poor first-quarter showing and the uncertainty regarding Singapore’s near-term property market are probably the main reasons investors have been shunning the real estate brokerage company.
However, at this price, it could warrant a closer look for long-term investors who believe Singapore’s property prices will trend upward eventually. While quarterly transaction volume may fluctuate wildly, total property transactions are also likely to increase over the long term.
I believe investors who are willing to play the long game would likely be rewarded by investing in APAC Realty now.
Worried about the overall state of the market? Do you know the 1 thing you should never do in the stock market? The Motley Fool Singapore’s new e-book lays out a plan to handle market crashes, details the greatest advantage you have as an investor, and looks at decades worth of market data to bring you the smartest insights on investing. You can download the full e-book FREE of charge—Simply click here now to claim your copy
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.