Propnex is Singapore’s largest listed real estate agency, with 7,670 property agents under its wing as of 23 April 2019. The bulk of its revenues come from its real estate brokerage business, where agents generate commissions from facilitating property transactions. It also provides project marketing, property management, training services, and administrative support services. Propnex is a relatively new listing on the SGX mainboard, with its IPO less than a year ago.
Having heard of the company before, I was tracking its IPO rather closely, and to me, the volatility of Propnex stock in its first trading week was nothing short of amazing. After an IPO that was 2.2 times oversubscribed at 65 cents, Propnex shares hit a peak of 79 cents intraday, before plunging to 52 cents by the end of the week as the government announced property market cooling measures.
While Propnex shares are still trading below its listing price, the company delivered some very impressive numbers for fiscal 2018. In view of that, I attended Propnex’s 2019 AGM for further insight on the company’s prospects.
Here are 10 key takeaways from Propnex’s 2019 AGM:
1. Revenues grew 30% year-on-year to S$431.8 million in fiscal 2018, while profits of S$21.9 million were up 16% year-on-year. These impressive growth numbers were driven by a 10% increase in Propnex’s agent base from 6,684 in January 2018 to 7,400 in January 2019. This enabled the company to gain market share in the local market. For instance, Propnex accounted for 50.3% of HDB resale transactions in 2018, which was an increase from 45.3% in 2017.
2. The board declared a 3.5-cent dividend for fiscal 2018, which included a 2-cent special dividend. Propnex stated in its prospectus that it intends to distribute at least 50% of the company’s yearly profit to shareholders. Keeping true to that promise, this year’s dividend amounts to 66.7% of the company’s 2018 profits.
3. In his prepared remarks, the CEO divided property transactions into two groups — recurring and non-recurring. According to CEO Ismail Gafoor, transactions involving HDBs, landed properties and rental properties tend to be more resilient in the face of policy changes and cooling measures. For instance, transactions in the HDB market are a necessity in both marriages and divorces. On the other hand, transactions involving new launches depends largely on market sentiment, while transactions of private houses can be dampened if the government implements measures to deter foreign investment. Fifty-seven percent of Propnex’s 2018 revenues came from new launches and private housing transactions.
4. Propnex differentiates itself through training. The company conducts regular conventions and bootcamps for its property agents. The CEO cited the company’s most recent convention, which featured a one-hour dialogue session with Minister Heng Swee Keat. These conventions are meant to give agents a better understanding of the property market. Propnex also regularly conducts a three-day bootcamp for new agents. The bootcamp, which is conducted by experienced Propnex sales agents, features an in-house curated program designed to improve its participants’ abilities. The CEO emphasized that these trainers are not paid for their services, adding that ‘paying it forward’ is in the culture of the company.
5. The CEO expects transaction volume to be strong across the board in 2019. In the private resale market, the CEO expects strong transaction volumes owing to demand from owners of en-bloc properties. 2018 was a record year for the en-bloc market, with transaction values hitting S$10.5 billion. As of April 2019, about half of these en-bloc property owners have not received their funds. As these property owners receive their proceeds in 2H 2019, there will likely be a surge in private property transactions. Besides this, there are 69 new launches lined up for 2019, which are expected to bring a total of 25,000 new units to market. Propnex has been appointed by developers to sell 19,000 of these units, which already exceeds the 12,000 units that the company was appointed to sell in 2018. Finally, out of the 100,000 Built-To-Order (BTO) HDB flats brought to market by the government after the 2011 general elections, 31,000 will reach their five-year mark in 2019. The CEO expects a number of these flats to enter the market this year.
6. A shareholder expressed concern over the possible disruption of a property agent’s role by technology. The CEO admitted it is inevitable that some market share will be lost to new platforms and technologies. However, he stressed that Propnex trains its agents to be more than just a middleman. Agents typically add value by providing advice to clients. While technology has the potential to disrupt, the CEO revealed that technology could also be used to the company’s advantage. For instance, the company recently launched a ‘grab tagger’ feature on its Propnex Personal Assistant app. The app enables agents to inform their colleagues when a client expresses interest in a certain property.
7. Another shareholder noted that the company has expanded into Indonesia, Malaysia, and Vietnam, and asked about the ownership structure of subsidiaries in these countries. According to the CEO, ownership structure depends on the laws of the specific country. For instance, foreign entities are unable to hold direct interests in Indonesian real estate firms. Hence, Propnex simply franchises its brand to its Indonesian partner and collects a royalty for every successful transaction. On the other hand, Malaysian law restricts the company from operating a franchise. Hence, the company’s Malaysian partner simply pays Propnex a fee for services rendered. Lastly, as Vietnam law allows foreign ownership of local property firms, Propnex has taken a 25% stake in its Vietnamese subsidiary.
8. Another shareholder followed up by enquiring about the percentage of the company’s revenues from the Singapore market. As the company has recently started its overseas expansion, 97-98% of its revenues still come from Singapore. While its overseas business still accounts for a minute portion of the company’s revenues, the CEO thinks that this segment will grow to become more substantial over time.
9. Another shareholder asked if the company is considering expanding to China. While the CEO acknowledged that China has a large property market, the company does not have immediate plans to expand into the country. However, the company will continue to look for viable opportunities to expand. The CEO continued by stressing that the company’s priority is to select overseas partners that share similar values. In fact, Propnex rejected a number of potential partners even though they were keen about bringing the company’s brand to their markets.
10. Towards the end of the session, a shareholder expressed concern over the company’s trade receivables of S$61.2 million. In response, the CEO explained that the biggest beneficiaries of these receivables are agents, who will receive 80-90% of this figure as income. He considers this a safeguard for the company, as agents are incentivised to monitor the status of payments on their own accord. More importantly, most developers maintain a project account that contains the required funds. CFO Cheong Yew Meng added that the company has a collection team that ensures all receivables are collected in a timely manner.
The fifth perspective
I came away from the meeting with a much better idea of Propnex’s business model and its future prospects. While the company’s culture and strategy will likely drive growth going forward, the company’s business is ultimately cyclical and largely contingent on the Singapore government’s policies. Unless Propnex increases its share of recurring revenues, expect shares to be volatile in the face of significant policy shifts.
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