Oxley Holdings Limited - DBS Research 2018-04-23: Riding On Residential Tailwinds

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OXLEY HOLDINGS LIMITED 5UX.SI

Oxley Holdings Limited - Riding On Residential Tailwinds

• Oxley - One of the largest land banks with a substantial residential portion of c.4,000 units to be launched over 2018/2019.
• Recurring income stream to grow strongly from an expanding commercial portfolio.
• Strong sell-through rates and execution of its overseas ventures to alleviate concerns that financials are stretched.
• Trading at 54% discount to RNAV; fair value of S$0.68. 

THE BUSINESS

Strong pipeline of residential profits.

• After a 5-year hiatus, Oxley returns to Singapore with a bang, amassing a substantial residential land bank of nearly 4,000 units worth c.S$3.0bn in attributable gross development value (GDV). With tailwinds from an improved residential market, strong sell-through rates for its projects when launched over 2Q18-2019 could drive Oxley share price higher. 
• Outside Singapore, Oxley Towers KLCC and Deanston Wharf could contribute an additional c.S$1.3bn when launched and sold.

Potential unlocking of Singapore hotel assets, which could fetch bids of S$1.2m a key.

• The keen competition for hotel assets could offer an opportunity for Oxley’s recently completed Novotel and Mercure hotels, estimated at c.S$910m (S$1.2m/key), which we believe is not reflected in the share price. If a sale materialises, it would empower the group with improved financial flexibility, lowering its debt-to-equity ratio towards peer average of 1.2x (vs 2.1x as of 2Q18).

Addressing its high leverage of 2.1x should instil investor confidence.

• Oxley’s high debt-to-equity ratio of 2.1x stands out among peers, which means that the group needs to remain nimble and maintain a quick-asset-turn strategy. The group’s high debt levels will not put it in good stead in the event of an external shock or a slowdown in property sales momentum as it could undermine profits. 
• Potential higher interest costs upon refinancing of its bonds in 2019/2020 could mean that a quick-asset-turn strategy has to be employed in this current property market upcycle. 
• Potential asset sales in Singapore and the UK will further strengthen its balance sheet.

THE STOCK

Trading at c.50% discount to RNAV.

• Our RNAV of S$1.05 is derived after revaluing Oxley’s existing investments and development projects. After imputing a 35% discount to RNAV (vs 10% discount for large-cap developers), we arrive at a fair value of S$0.68.
• Key risks include

1. execution of project launches,
2. policy risk, and
3. rising gearing levels and interest costs in a rising rate environment.

REVENUE DRIVERS

Dynamic developer.

• Oxley Holdings Limited (“Oxley”) is principally engaged in the business of property development and property investment. Listed back in October 2010, Oxley started out as a young and dynamic property group in Singapore and has since expanded into 11 other geographical markets - the United Kingdom, Ireland, Cyprus, Cambodia, Malaysia, Indonesia, China, Myanmar, Australia, Japan and Vietnam.
• Revenues are primarily derived from its diversified portfolio of property development and investment projects but Oxley’s expertise does not end there; the group also provides project management and consultancy services in Myanmar.

Prized overseas projects are key value drivers.

• Over the past few years, the group has amassed a development and commercial portfolio worth over S$9.3bn in projected GDV, the majority of which stems from overseas markets. 
• Based on our estimates, Oxley derives c.32.9% of its effective GDV from Singapore, and the remaining c.67% abroad. The group’s UK flagship project The Royal Wharf alone makes up c.27.2% of effective GDV. Dublin Landings, a mixed-use development, represents a further c.9.4%. One of its upcoming office blocks (“No. 1 Dublin Landings”), which occupies c.35% of site GFA, is scheduled for sale in April 2018 for EUR164.2m, of which Oxley has a 77.53% share.

Impressive track record continues; Singapore launches to drive NAV growth.

• History shows that Oxley has been quick in reacting to market opportunities. The group has launched and completed 21 residential projects in Singapore, where sell- through rates have been impressive. We observe that eight in ten of Oxley’s local projects were over 85% sold within three months of launch – a trend which is set to continue.
• After a 5-year hiatus, Oxley has returned to the Singapore residential market where it has amassed substantial residential land bank of c.4,000 units worth c.S$3.0bn in effective GDV. Its track record of being able to ride the property uptrend is displayed once again through the strong take-up rates for The Verandah Residences. About 76% of units were sold within two days of the official launch. 
• With a pipeline of ten further projects that are launch-ready and expected to hit the market in the next 1-2 years, strong sales momentum will be a catalyst for Oxley's share price to re-rate.

Earnings visibility from over S$2bn in unbilled contracts, and growing.

• As at end-2Q18, Oxley had locked in c.S$2.1bn in unbilled contracts, which roughly represents 1-2 years of revenue. Of these, c.55% are to be derived from The Royal Wharf. 
• The strong 2018 launch pipeline, which carries an effective GDV of c.S$3.6bn for Oxley, should drive further earnings visibility ahead.

KEY OPERATING ASSETS

Diversified portfolio of quality assets to grow recurring income by > 10x over FY17-20F. 

• Oxley’s investment portfolio, initiated in FY15, has undergone rapid expansion and is currently valued at over S$2.0bn. The commercial and hospitality segments remain the group’s predominant exposure. Notably, prime commercial and hospitality assets - Chevron House, and Mercure / Novotel on Stevens hotels are main assets in the portfolio. We have classified Dublins Landings as “for sale” rather than in investment properties.
• Recurring income had grown from just S$0.6m (FY15) to S$10.9m (FY17), and is set to grow at least fivefold in FY18F following the launch of the Mercure and Novotel hotels in Singapore in late 2017 and acquisition of Chevron House in March 2018. Based on the current pipeline, we project recurrent income streams to reach S$149m p.a. by FY20F, forming over 10.6% of consolidated revenues (vs 0.8% in FY17), which should further enhance the stock's attractiveness.

MANAGEMENT & STRATEGY

Visionary and bold leaders.

• Oxley was founded following a partnership between Mr Ching Chiat Kwong (CEO) and deputy CEO Mr Eric Low See Ching, who have been instrumental in the group’s remarkable growth. Under their leadership, Oxley’s PATMI has grown over 15x, from c.S$13.4m in FY11 to S$218.1m in FY17.
• We attribute this mainly to their bold strategies and larger risk appetite – they were among the first to venture abroad, but the group’s immaculate timing and execution also played an important role. Most recently, the group continued to impress with its speed to market with The Verandah Residences (formerly Lotus @ Pasir Panjang), which was launched within eight months.

Management’s interest well aligned with that of minority shareholders.

• At a glance, the c.70% y-o-y jump in the CEO’s remuneration to S$15.5-15.75m in FY17 may spark concern, especially given the large quantum. However, with only 2% (or c.S$300,000) tied to salary and the remaining 98% due from performance bonuses, Oxley’s executive remuneration structure appears sustainable and fair.
• Both Mr Ching and Mr Low are shareholders themselves, with c.41.1% and c.27.6% stakes in the company respectively. While Oxley does not have a fixed dividend policy, its steady record of dividend payments since its IPO in 2010 provides further affirmation of management’s commitment towards the interest of minority shareholders.

Building bridges locally and abroad.

• In Singapore, Oxley regularly partners with leading developers/contractors to bid for land sites and has over time forged strong relationships with the likes of Lian Beng, KSH Holdings and other private investors. This allows Oxley to tap its partners’ strengths in construction, financial resources, and to diversify its exposure selectively across the island. Upcoming projects include Rio Casa and Serangoon Ville.
• As part of its strategic expansion overseas, the group leverages on its strengths and strong domestic track record to secure coveted deals with reputable and strategic partners abroad. This has allowed Oxley to remain nimble and capital- efficient, driving quick turnaround to maximise ROE and profit potential.
• London’s Royal Wharf and Dublin Landings in Ireland are key examples. Given attractive collaborative structures with Ballymore Group and low upfront capital requirements for these prime projects – which is rare for overseas developments given off-plan arrangements typically, we estimate that Oxley would be able to achieve record project ROEs in excess of 30%.

GROWTH PROSPECTS

Unlocking of value for commercial assets.

• The sale of No. 1 Dublin Landings, which was originally earmarked for injection into Oxley’s property investment portfolio, will provide a boost to the group’s profitability and cashflows in FY18F. Further upside from this prime commercial development could come from the successful expression of interest for adjacent building, No. 2 Dublin Landings.
• Closer to home, the keen competition for hotel assets could drive realisable value for Oxley’s recently completed Novotel and Mercure to at least S$911m (S$1.2m/key). This will crystallise the group’s NAV and empowers the group with greater financial flexibility to deleverage. Given its proximity to the premier Orchard Road shopping belt and prospective yield of 5.3% (based on 88% occupancy rate) vs average hurdle rates of 3-4%, we believe the attractively valued asset could draw strong investor interest ahead.

Untapped GFA and Asset Enhancement Initiatives (AEIs) to drive yields

• ..., particularly for the iconic 261,272-sqft commercial site Chevron House which was successfully acquired by Oxley for S$660m in March 2018, at a net acquisition yield of c.3.8%.
• Comprising both office and retail space, we see headroom for positive rental reversions ahead - especially with anchor tenant Chevron’s lease due to expire in 2020, which could see an uplift from c.S$7 psf currently to c.S$9 psf, based on recent transactions for office leases in the vicinity. 
• The group also sees potential for further optimisation of its untapped GFA (i.e. from closing up retail void) and has budgeted S$30m for AEI, which we estimate could boost GFA by c.10% and drive rental income and yields closer to 5-6% in the coming years.

Upside from acquisitions.

• Over the years, Oxley has selectively acquired stakes in related businesses, mainly for their quality asset and development portfolios and/or synergistic properties. In 2015, the group acquired a 20% stake in Galliard (Group) Limited, a leading property developer in the United Kingdom overseeing a wide variety of developments across London and Southern England. Since then, Oxley has also acquired a 40% stake in Pindan Group Pty Ltd, an integrated project group based in Western Australia and a c.15% stake in United Engineers, a Singaporean property development and engineering company with an undervalued asset portfolio.
• Apart from the potential for investment returns, these synergistic acquisitions could also lead to further business opportunities for Oxley ahead, and believe that the group could still be on the lookout for other complementary M&A opportunities to further its growth ambitions.

VALUATIONS

Trading at premium to current NAV but at c.50% discount to RNAV.

• Owing to strong income generation on its iconic asset portfolio and unique overseas exposure – which offer above-average ROE, Oxley is one of few property developers trading at a premium to current NAV (P/NAV of 1.2x).

Fair value of S$0.68.

• Based on our estimates, we revalue the group’s realisable net asset value (RNAV) at S$3.8bn, implying a per share value of S$1.05.
• Our RNAV is based on the valuation of Oxley’s existing investments, land bank and development projects, including the potential revaluation of the Novotel and Mercure hotels based on recent transactions for similar assets. After imputing a 35% discount to RNAV (vs 10% discount for large-cap developers), we arrive at a fair value of S$0.68for the company.
• Assuming the 1.5-Sct dividend paid in FY17 is maintained for FY18F, this represents a prospective yield of nearly 3%.

KEY RISKS

Uncertainty over sell-through rates.

• Eight of Oxley’s residential development sites in Singapore are poised for launch in 2018. While slower take-up rates could further weigh on financing and constrain working capital, we believe the group’s speed- to-market and bite-sized launches could help mitigate risk.

Gearing levels to rise further in subsequent quarters.

• While gearing (D/E) decreased sequentially from 2.27x in 1Q18 to 2.1x in 2Q18, we project that c.S$1.8bn of Oxley’s commitments remain unfunded. 
• Assuming 85% funding for Chevron House and recently acquired land plots (Apartment 8, Vista Park and 3 Tessensohn Road), we estimate that gearing could rise to c.3.1x in subsequent quarters but fall back to 1.8x and below if the group is able to deliver strong sales.

Return *: 2 
Risk: Moderate
Potential Target 12-mth* : 12-month S$0.68 (38% upside)

Carmen TAY DBS Vickers | Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2018-04-23

SGX Stock Analyst Report NOT RATED Maintain NOT RATED 0.68 Same 0.68

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.