ROXY-PACIFIC HOLDINGS LIMITED
E8Z.SI
Roxy-Pacific Holdings - Sexy Roxy
- Roxy-Pacific revealing seven freehold sites in Singapore in 2018, with estimated GDV of S$0.5bn.
- Beefing up its recurring-income portfolio and diversifying its geographical presence.
- Realising c.S$300mn in GDV when development projects in Australia are completed in 2018 / 2019.
- Initiating coverage with BUY and TP of S$0.69.
INITIATE WITH BUY; TARGET PRICE OF S$0.69.
- We initiate coverage with a BUY rating and TP of S$0.69 (based on 30% discount to RNAV) for Roxy-Pacific Holdings (Roxy).
- Benefitting from being early in the current en-bloc cycle, Roxy is one of the few “undiscovered” mid-cap developer proxies to ride the recovery of the Singapore property market. BUY!
WHERE WE DIFFER:
Poised to hit an upbeat Singapore property market with seven freehold residential developments.
- We are the first brokerage to initiate coverage on Roxy-Pacific.
- While the market may have overlooked Roxy for its size, we believe “best things come in small packages”.
- We believe Roxy-Pacific, being one of the earliest to landbank in the current market cycle, has seven freehold residential developments in Singapore which will be ready to launch in 2018, three of which will be launched within 1Q18. We see this as a window for the group to capture the rise in buyer demand before its peers.
POTENTIAL CATALYSTS:
Strong sales take-up, more landbanking, acquisitions of good-quality investment properties.
- Beefing up its recurring income and diversifying its geographical presence. In FY17, Roxy had acquired four new commercial buildings in Australia / New Zealand and one hotel property in Japan.
- Its portfolio of its investment properties has grown close to threefold to S$330mn. These properties will start contributing in FY18, thus raising contributions from investment properties to 35% in FY18F from 20% in FY16.
HIGHLIGHT
First to the market! Launching seven projects (FREEHOLD) in Singapore next year with > 400 residential units that could generate > S$0.5bn of GDV.
- As developers now rush to landbank, Roxy-Pacific can reap the benefits of being one of the developers to catch the wave early and successfully acquire seven plots of land to be launched in 2018.
- Roxy-Pacific started landbanking since 2H16 and has successfully acquired at least 4-5 plots of land (out of a total of seven plots of land) at reasonable prices compared to recent land-bid prices. As such, Roxy has a total of c.476 residential units to be launched in 2018 that could potentially generate more than S$0.5bn of total GDV. On an effective GDV basis, it is close to 50% of its FY16 revenue from development properties.
- Roxy-Pacific plans to launch at least 3 projects in 1Q18 (Eunos, Grange Road and Harbourview) and one to two remaining projects in each of the following quarters. Management sees this as a window, given the limited project launches in the pipeline, and thus plans to launch as early as possible when demand is still hot and most of its peers have limited projects to be launched.
Beefing up its recurring income portfolio.
- Since the slowdown of the Singapore property market in 2013, Roxy-Pacific has started to venture out of Singapore and expanded its horizon to build its portfolio of assets to improve recurring income and provide stability in earnings. This year (FY17) alone, Roxy has acquired four commercial buildings, two in Australia and two in New Zealand, adding to its portfolio of one commercial building (excluding the divestment of the commercial building at 59 Goulburn Street, Sydney.
- The size of its investment properties has grown close to threefold to S$330mn. Similarly, contributions from investment properties (including share of associates) could triple, raising it to 35% in FY18F from 20% in FY16. We believe management will continue to look for opportunities to build its investment properties, focusing in the major cities of Sydney, Melbourne, Auckland, and Singapore.
- In addition, the Group continues to build its hospitality segment which will add to its recurring income. In FY17, the Group acquired Tenmabashi Grand Hotel Osaka for JPY3bn.
Realisation of c.S$300mn GDV in 2018 / 2019 from five development projects in Australia.
- Roxy-Pacific's investments into development projects in Australia in 2015 will soon pay off when five projects complete in 2018 / 2019. The projects have all been substantially sold (> 95% sold) except the last project launched in 3Q17; Art House at West End Glebe.
- The units sold have a total sales value of approximately S$300mn and could potentially contribute 21% to 44% of FY18F – FY19F earnings.
COMPANY BACKGROUND
Corporate History.
- Roxy-Pacific is an established property and hospitality group with an Asia-Pacific focus and a track record that extends back to May 1967. It was listed on SGX on 12 March 2008.
Carving a niche for small-to-medium-sized residential developments.
- Roxy-Pacific has carved itself a niche and established itself as one of the reputable brand names for small-to-medium-sized residential developments such as apartments and condominiums targeted at middle-to-upper-middle income segments.
- Since 2004, the Group has developed and launched more than 43 small-to-medium-sized developments comprising more than 4k residential and commercial units in Singapore, Malaysia, and Australia.
Owns a small portfolio of hospitality assets and building its portfolio of investment properties.
- Aside from its development properties, one of its major assets is Grand Mercure Singapore Roxy which is self-managed under a franchise agreement with international hotel operator Accor Group.
- In addition, the Group continues to build its hotel properties with acquisitions of Japanese hotels and some development hotels in Maldives, Thailand, and Perth.
- For investment properties, the Group owns 52 retail shops at The Roxy Square Shopping Centre in Singapore and continues to build its commercial portfolio. It now owns three office buildings (excluding 59 Goulburn which was divested in Oct17) in Australia and two office buildings in New Zealand.
Stable key management team serving more than 15 years in the company.
- Mr Teo Hong Lim, Executive Chairman and Chief Executive Officer, and Mr Chris Teo Hong Yeow, Executive Director and Managing Director, both joined the company in 1993 and has led the company since then. Mr Koh Seng Geok, Executive Director and Chief Financial Officer, joined in 2001 and has remained in the company since then.
Key management’s interests are aligned with the company’s - Executive Chairman and CEO owns a substantial stake in the company.
- According to the latest announcement, we estimate that Mr Teo Hong Lim effectively owns more than 20% of Roxy (directly and indirectly). The Teo family (including Mr Teo) owns 61% via shareholdings held under Kian Lam Investment Pte Ltd and Sen Lee Development Private Limited. Hence, we believe that key management’s interests are aligned with the company’s as the family owns majority stakes in the company.
COMPETITIVE STRENGTHS
One of the earliest to landbank from 2H16.
- Roxy-Pacific was one of the earliest to start landbanking (since 2H16) among the mid-to-small-cap developers and has successfully acquired seven plots of land which will be launched in 2018.
- While most of its developer peers are still trying to landbank, Roxy has the upper hand to launch as early as possible to capture the demand when it is still “hot” before its peers.
Niche segment – small-to-medium-sized freehold developments in strategic locations.
- Roxy-Pacific has carved itself a niche, focusing on small-to-medium-sized developments on freehold sites at strategic locations. The number of units for its new projects ranges between 30 and 150 units. The bitesized development reduces the risk of unsold units if take-up rates are slower than expected.
- All its landbank are freehold sites, with five out of seven located in the central region (CCR and RCR); only two sites are located in the OCR (Outside Central Region).
Being small and nimble gives the company flexibility to adapt to change.
- Roxy-Pacific has remained small and nimble, adopting the quick-turnaround model with its bite-sized developments. This gives it the flexibility to adapt to changes in sentiment and the outlook for the property market.
Building its recurring income portfolio for earnings stability.
- In FY17, Roxy acquired four commercial buildings, two in Australia and two in New Zealand, adding to its portfolio of one commercial building (excluding the divestment of 59 Goulburn commercial building).
- As the recurring-income portfolio grows, it is building a base for earnings stability and diversifying its risks of being exposed to only a single country.
GROWTH STRATEGIES
Launch of seven development properties in Singapore to ride the upturn in the Singapore property market.
- Roxy-Pacific has a total of c.476 residential units to be launched in 2018 that could potentially generate more than S$0.5bn of total GDV. On an effective GDV basis, it is close to 50% of FY16 revenue from development properties.
- Assuming 100% take-up rates, sales volume could potentially grow 8x y-o-y on annualised sales volume for FY17.
Beefing up its recurring-income portfolio following the acquisitions of five investment properties (including one hotel property).
- Following the recent acquisitions of investment properties, its portfolio of investment properties has grown close to threefold to S$330mn. Similarly, contributions from investment properties (including share of associates) could triple, thus raising their contribution to 35% in FY18F from 20% in FY16.
- We believe management will continue to look for opportunities to build its investment properties, focusing on major cities in Sydney, Melbourne, Auckland, and Singapore.
Diversifying its portfolio to other markets.
- Since the slowdown of the Singapore property market in 2013, Roxy has started to venture out of Singapore and diversify its portfolio into other markets such as Australia, New Zealand (commercial), and Japan (hotel), reducing a single-country exposure risk.
KEY RISKS
Slower take-up rates.
- With seven developments expected to be launched in FY18, slower take-up rates for its properties would impact the needs for more financing, thus, increasing its costs. In addition, Roxy has the five-year timeline to complete its sales before the ABSD and QC charges kick in.
- However, Roxy could potentially launch its projects ahead of its peers as it was one of the earliest to landbank. In addition, its bite-sized developments should reduce this risk, especially in an upward demand cycle.
Government regulates more to manage Singapore property.
- Despite the multiple ‘warnings’ by the government to be cautious of excessive exuberance in the property market, the land bids and the property market remain robust and bullish. We remain cautious that the government may decide to implement some measures to ensure that the Singapore property market remains sustainable in the medium term and that it doesn’t become a “runaway train”.
- Depending on the measures implemented, they could impact both the demand for Roxy’s projects or its future landbanking opportunities.
AUD / NZD / JPY forex fluctuations.
- As Roxy-Pacific has diversified its geographical presence with acquisitions of investment properties in Australia, New Zealand, and Japan, fluctuations in foreign exchange could impact these properties’ contributions.
Acquisitions of less desirable investment properties.
- Despite the benefits of being small, Roxy-Pacific may be constrained by capital and scale in purchasing bigger and better-quality investment properties, which could delay its speed in building scale in its recurring-income portfolio that could potentially generate better efficiencies and economies of scale.
VALUATION
Initiate with BUY rating; TP of S$0.69.
- We initiate with a BUY rating and target price of S$0.69 per share, offering a potential upside of 30%. Target price is based on 30% discount to RNAV.
- The stock currently trades at 1.2x FY18F P/BV, below historical average. At its peak, Roxy trades at 2.3x P/BV.
- We believe Roxy is a good small-to-mid-cap proxy to Singapore property and is poised to benefit from upbeat sentiment in the sector from the launch of seven freehold residential properties ahead of its peers.
- In addition, Roxy-Pacific, being small and nimble, has been selective in small but freehold land sites. This gives them the flexibility
- to launch quickly and hit the market before its peers,
- to adopt the quick-turnaround model, and
- to change according to market sentiment.
- Key potential catalysts are
- strong sales take-up rates upon launch,
- ability to landbank continually,
- acquisition of good-quality investment properties.
Rachel TAN
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Derek TAN
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2017-12-12
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