APAC Realty Ltd (SGX: CLN) is a leading real estate services provider which holds the exclusive ERA regional master franchise for 17 countries in Asia Pacific. Through this network, the group has one of the largest footprints in Asia, with more than 17,700 salespersons across 633 offices. APAC also has a market-leading position in Singapore through its wholly-owned subsidiary ERA Realty Network Pte Ltd.
The group reported a good set of earnings for fiscal year (FY) 2018, with total revenue up 5.8% year-on-year but with operating profit flat. Due to good free cash flows generated for both FY 2017 and FY 2018, APAC Realty paid out two dividends last year – an interim dividend of 2 Singapore cents and a final dividend of 2.5 Singapore cents, for a total of 4.5 Singapore cents. At the last traded price of S$0.55, the historical yield for the group was an impressive 8.2%. However, is this level of dividends sustainable moving forward?
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Property cooling measures
In July 2018, the Government slammed another set of property cooling measures on the market without warning. The reason for this was due to the continued rise in property prices, which may cause property to be out of reach for many Singaporeans in time to come. The measures included a tightening of the loan-to-value ratios for mortgage loans, as well as higher additional buyer’s stamp duty (ABSD) being levied on real estate transactions.
Over the months since the measures were implemented, transaction volumes have all but collapsed, and the previous en-bloc “fever” which saw many older condominiums get bought out by property developers also ground to a screeching halt.
Significantly weaker Q1 2019 earnings
As a result of the above, APAC has seen its earnings take a severe hit, beginning from Q4 2018 and carrying on into Q1 2019. For Q1 2019, revenue was down 26.4% year-on-year but the fall in net profit was even larger at 70% due to cost and expenses falling by a lesser 23.4%. The government has also recently come out to declare that the cooling measures will not be lifted anytime soon and that it has successfully achieved its objectives of halting unsustainable price rises.
High likelihood of a dividend cut
As a result of the poorer overall sentiment for real estate and also the collapse in the volume and value of total property transactions, APAC’s business is likely to continue to be under stress for the foreseeable future. A reduction in total dividends is a very likely scenario as lower profits will also translate to lower levels of operating cash flows. In addition, APAC has around S$56.7 million in debt for which it has to service the interest on, and this will further suck up cash flows for the group.
Investors should keep faith
As it was the first time last year that APAC paid out both an interim and a final dividend, there is a strong likelihood that the interim dividend will either be greatly reduced or eliminated. Investors should continue to keep the faith, however, as real estate remains a very attractive asset class for Singaporeans to invest in. This fact should mitigate the risk of an extended downturn in the property market. There is also a chance that the cooling measures may be lifted if property prices continue to moderate.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.