Oxley Holdings - Maybank Kim Eng 2018-06-01: Rising Through The Ranks

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OXLEY HOLDINGS LIMITED SGX: 5UX

Oxley Holdings - Rising Through The Ranks

Outperformance to continue; initiate with BUY

• We initiate coverage of Oxley with a BUY and SGD0.56 Target Price, based on a 20% discount to our RNAV. 
• We expect its sector-leading returns to continue, on the back of contributions from new local launches and the recognition of strong overseas pre-sales. We forecast ROEs of 16% for 2018-20E vs a 6% average for its peers. 
• Trading at a 38% RNAV discount and 8x P/E, valuations are not demanding against its robust outlook, in our view.

Capturing Singapore’s residential rebound

• We believe successful launches by Oxley in Singapore’s residential market could narrow its RNAV discount, as it would crystalise about 10 cts/share of development surplus. 
• With timely land acquisitions in the early part of this cycle, we estimate it has over 4,000 units worth SGD5b in GDV to capture a residential rebound. And with a land-cost advantage at several projects, we expect competitive pricing for swift sales.

INVESTMENT SUMMARY

Capturing a rebound in Singapore’s residential market

• Successful launches in Singapore’s residential market could narrow its RNAV discount, we believe, as it would crystalise about 10 cts/share of development surplus. 
• Oxley and its partners were early in identifying an impending rebound in Singapore’s residential market and started acquiring sites in mid-2017. This allowed the company to accumulate a sizeable inventory of over 4,000 units worth a combined GDV of SGD5b. 
• Our calculations suggest that it now has the largest housing stock in Singapore. Its well-timed acquisitions also give the group a considerable land-cost advantage at several projects, which could lead to competitive pricing for swift sales. This should underpin a rebound in local earnings ahead of their completions in FY21-23E.

Value creation from repositioning of Chevron House

• We believe Oxley can capitalise on an unfolding pick-up in Singapore’s office market to generate 3.5 cts/share of value with its newly-acquired Chevron House. 
• Given vacancy risks from an impending exit of its anchor tenant, Oxley’s acquisition cap rate of 3.7% appeared low to the market, which believed it could have overpaid for this ageing asset. But while near-term occupancy could be weak, we see an opportunity to fill up the vacancy with higher-yielding tenants. 
• With limited prime office supply expected in 2018-20E, we believe Oxley can lift committed rents at this building over the next few years. Along with management’s efforts to expand NLA by 20% via AEI, we see the potential for a 35% NPI uplift by 2021E.

Venture overseas a hallmark of its versatility

• Near-term earnings should be anchored by overseas markets. Unbilled sales of SGD1.6b from various countries have effectively locked in 4.8 cts/share of development surplus, in our estimation. 
• Since its 2010 IPO, Oxley has differentiated itself by switching between asset classes and geographical markets. We believe its versatility has been key to its sector-leading returns, allowing it to generate a 5-year average ROE of 33% vs 9% for peers amid a domestic housing-market slowdown in 2013. Spearheaded by completions overseas, we expect its outperformance to continue and forecast ROEs of 16% for 2018-20E vs a 6% average for peers.

Decent interest coverage, though high gearing may be a constraint

• With cashflow visibility from strong unbilled sales and growing recurring income, we are confident about its debt-servicing ability in the year ahead. Even after pricing in a 50bps rate hike for its variable-rate loans, EBITDA cash interest expense remains decently covered at 1.7x for FY19E. 
• Furthermore, refinancing requirements in the near term are low. That said, elevated gearing could limit its ability to take on more projects. The company’s debt covenants restrict its dividend payouts to less than 30% of its consolidated EBITDA once its gross debt to equity reaches 3.0x. They also limit its gross debt to assets to a maximum of 0.70x and require the company to maintain tangible net worth of at least SGD500m. This compares with our forecasts of 2.9x gross debt to equity and 0.61x gross debt to assets by FY18E. 
• Using its gross debt to assets limit as a basis, we calculate debt headroom of just SGD0.5b for the company.

Rising star that investors can no longer ignore; initiate with BUY

• With total returns of 276% since Dec 2010, Oxley’s stock has outperformed the sector, which has returned just 34%. We believe its outperformance was spurred by its sector-leading ROE of 33% in the past five years vs 9% for peers. 
• We forecast 16% for 2018-20E vs a 6% average for peers. With enlarged shareholders’ equity of SGD1.3b vs SGD120m immediately after its IPO, we believe it now has the balance-sheet capacity to compete head-on with its larger peers for bigger and more sophisticated projects. Oxley is also now more investible, with a larger free float of 20% and enhanced stock liquidity after its recent share placements. 
• At a 38% discount to RNAV and 8x FY19E P/E, valuations are not demanding against its robust growth outlook, in our view. 
• Initiate with BUY and a SGD0.56 Target Price, based on a 20% discount to our RNAV of SGD0.71.

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COMPANY BACKGROUND

Market cap has more than tripled since IPO

• Oxley was listed on the Catalist, the junior board of the Singapore Exchange (SGX SP, CP SGD7.24, BUY, Target Price SGD8.79), in Oct 2010 with a market capitalisation of SGD566m. 
• Led by Executive Chairman and CEO Mr Ching Chiat Kwong, the company then had a pipeline of 15 projects in Singapore that was expected to yield development profits of SGD443m. 
• The stock was transferred to the mainboard in Feb 2013, after two years of solid earnings. Market cap has more than tripled since its IPO to SGD1.8b.

More investible after recent placements

• Following a series of share placements in Oct 2017 and March 2018, its free float has expanded 3.9ppts to 19.7%. CEO Mr Ching owns 41.1% while Deputy CEO Mr Eric Low owns 27.6%. Another major shareholder, Mr Tee Wee Sien, owns 11.6%. With a larger free float and enhanced liquidity of about SGD2m a day, we believe it is now more investible and should attract more investor interest.

Timely Return to Singapore

Strong proxy for strengthening residential market

• We see Oxley as a strong proxy for Singapore’s strengthening residential market, with the sector accounting for 28% of its valuation. 
• Following aggressive land-banking in the past year, Oxley and its partners have accumulated a sizeable inventory of over 4,000 units worth a combined GDV of SGD5b. Our calculations suggest that it now has the largest housing stock in Singapore. In fact, it appears to have leapfrogged City Developments the de-facto housing proxy, by stock count. 
• With improving sentiment in the housing market, we expect developers to sell 12,000 private homes this year, up 13% over the 10,600 sold in 2017. We expect Oxley to capture a sizeable part of this demand, which could potentially bump up its market share of completions from 1.7% since 2012 to almost 8% over the next five years.

Competitive land costs

• Oxley was early in positioning itself for a rebound in Singapore’s residential market. It started acquiring sites in mid-2017. Its well-timed acquisitions have given it a considerable land-cost advantage. 
• Of note are Rio Casa and Serangoon Ville, two of its largest sites which were acquired at very competitive land rates of SGD706 and SGD835 psf respectively. Land prices in the Serangoon, Hougang and Bidadari areas have since moved up significantly.

Expect swift sales as its ASPs are in a sweet spot

• Lower land costs should allow the company to price its products competitively for quick turnover. Transaction volumes have picked up across the board in the past year, with improving sentiment. The velocity of sales has been the strongest in the SGD1.0-1.5m price range. With 8,500 units or 35% of transactions last year in this price range, we believe this remains the sweet spot in the market. 
• Our calculations indicate that Oxley’s ASPs are SGD1.1-1.4m, which sit nicely in this range.

Potential re-rating from 10cts/share of development surplus

• We believe successful launches of its Singapore residential projects could narrow its RNAV discount, as it would likely crystalise about 10 cts/share of development surplus. While profit margins may not be maximised by selling out quickly in an upcycle, a developer can speedily lock in profits, thereby reducing its development risks. Furthermore, it can pare down debt with presales proceeds to reduce gearing, saving financing costs.

Value Creation From Repositioning Of Chevron House

Riding the office pick-up

• With its strata units at Oxley Towers and newly-acquired Chevron House accounting for 13% of our valuation, we believe Oxley will benefit from a pick-up in Singapore’s office market. In particular, we think it can ride the strengthening market to generate 3.5 cts/share of value with a repositioning of Chevron House.

Acquisition cap rate for Chevron House appears low…

• In Mar 2018, Oxley paid SGD660m or SGD2,526 psf NLA for this ageing commercial property in the heart of Singapore’s CBD. Although it already paid 6% less than the vendor’s initial asking price of SGD700m, the market believed it may have overpaid. This was because its acquisition cap rate of 3.7% appeared low, considering vacancy risks from an impending exit of its anchor tenant and a relatively short remaining land lease of 70 years for the property.

…but we see opportunity to improve its underlying performance

• Anchor tenant, Chevron, currently occupies 83k sf of space or 32% of the building. It is due to move out to newly-completed Duo in 2019/20. While property income could weaken for Oxley in the near term, we see an opportunity for it to fill the vacated space with higher-yielding tenants, given limited prime office supply expected in 2018-20E.

Versatility Key To Consistently Strong Returns

Versatility a differentiator

• Since its 2010 IPO, Oxley has differentiated itself by switching between asset classes and geographies. In Singapore alone, it completed 31 projects with a combined GFA of 5.1m sf across a swathe of assets. 
• Starting out as a developer of shoe-box housing units, it moved on to develop strata-titled commercial space to soak up investment demand, as the government tightened regulations on the residential market. 
• It ventured into the hospitality business by transforming The Pines, a private clubhouse, into two hotels with 772 rooms. We believe its versatility explains its ability to generate sector-leading returns even as the local housing market slowed in 2013: an important investment merit which may have been overlooked.

Reaping benefits of overseas expansion; 4.8 cts/share of surplus locked in

• Oxley turned its focus overseas when the Singapore market slowed in 2013. It is now reaping the fruits of its labour at Royal Wharf and The Bridge, which were its major earnings contributors in 9M18. 
• While company disclosures indicate that its overseas developments have a combined GDV of SGD10b on a stake-adjusted basis, we believe the market is unlikely to price them in fully, due to a lack of visibility on development details and timing. Nonetheless, we expect a focus on eight projects in the UK, Ireland, Malaysia, Cambodia and China, with an aggregate value of SGD6b. These have better development visibility. 
• Near-term earnings should be anchored by overseas markets. Unbilled sales of SGD1.6b from various countries have effectively locked in 4.8 cts/share of development surplus, in our estimation.

Addressing High Leverage

Gearing now a smaller lever of returns

• Oxley managed to punch above its weight by capitalising on an environment of cheap and easy funding since its 2010 IPO. Our DuPont analysis suggests that its sector-leading ROEs partly resulted from its willingness to take on much higher leverage than peers. With total assets to equity averaging 6.2x in the past five years, Oxley effectively took on five dollars of debt for every dollar of equity. This implies an aggressive LTV of 80%. However, with the era of low interest rates drawing to a close, we believe gearing is now a smaller lever for higher returns. 
• With the highest gearing among the Singapore property developers, investors are concerned about its vulnerability to rising interest rates.

Low near-term refinancing needs; 30% on fixed rates

• Oxley had SGD3.3b of debt as of 31 Mar 2018. About 30% was bonds issued at fixed rates of 5-6.4%. While refinancing needs are low in the near term, trading yields of its bonds are already higher than their issued rates. Hence, we expect borrowing rates to rise when they are eventually refinanced in 2020-22. The remaining 70% of its debt was bank loans typically on floating rates. 
• While interest-rate hikes could raise borrowing costs, such loans are typically cheaper than bond issuances, if secured against properties. For example, about SGD1b of debt due in 2020/21 is secured against its hotels on Stevens Road and Chevron House. Borrowings secured against development land are also cheaper.

Decent interest coverage

• After building in a 50bps rate hike for its variable loans, we forecast cash interest costs of SGD140m for FY19E. Roughly half can be capitalised as development expense, with the other half expensed off in P&L. This implies decent EBITDA interest coverage of 1.7x. Furthermore, we are confident that Oxley can service its financing expenses this year with cash collections from strong unbilled sales and growing recurring income.
• Strong unbilled sales. Oxley has SGD1.7b of unbilled sales. The handover of pre-sold homes at Royal Wharf and an office block at Dublin Landings should rake in SGD1.2b and SGD0.3b of cash in the next two years.
• Growing recurring income. Chevron House has bolstered its recurring income and added stability to its earnings. Recurring income should further improve when its hotel operations stabilise in the next few years. Our recurring EBITDA forecasts of SGD43-57m for FY19-20E already cover almost one-third of its cash interest costs.

The downside: high gearing limits its ability to take on more projects

• Nonetheless, elevated gearing could its limit ability to take on more projects. The company’s debt covenants restrict its dividend payouts to less than 30% of its consolidated EBITDA once gross debt to equity reaches 3.0x. They also limit its gross debt to assets to a maximum of 0.70x and require the company to maintain tangible net worth of at least SGD500m. This compares with our forecasts of 2.9x for gross debt to equity and 0.61x gross debt to assets by FY18E. 
• Using its gross debt to assets limit as a basis, we calculate debt headroom of just SGD0.5b.

FINANCIAL ANALYSIS

Near-term earnings from overseas projects

• Oxley has SGD1.2b of unbilled sales from its London project, Royal Wharf. Proceeds will be collected upon completion sometime in the next two years. More than 90% of the 3,385-unit project has been sold, with over 1,000 units already handed over to buyers. The remaining units will be transferred by 2019. 
• One office block at Dublin Landings has also been sold for SGD0.3b. We expect recognition upon completion this year. 
• Malaysia and Cambodia should contribute in FY21-22E. While profits from The Bridge, its 50% JV project in Cambodia, were largely recognised in 9M18, Oxley has started selling units at two other projects in Cambodia: The Peak and The Palms. Their contributions should kick in upon completion after FY20E. Over in Malaysia, Oxley Towers KLCC is expected to add to earnings after FY20E.

Contributions from Singapore to rebound

• We believe Oxley can build on its strong launch of The Verandah to sell another 1,600 units pa in the local market in FY19-20E. Their presales should be recognised ahead of project completions in FY21-23E. 
• Recurring income should also expand with its recently-acquired Chevron House and gradual stabilisation of its hotels on Stevens Road. Smaller projects such as Space @ Tampines and strata-titled units could also add to earnings. While these recurring income streams are less significant than its development business, they increase the stability of its earnings, in our view.

DPS upside

• We expect dividends to rise with stronger profitability. Payouts have averaged 31% since FY12. Following strong profits in FY14, Oxley distributed a record SGD103m that year. In Nov 2017, it committed to payouts of not less than 25%, excluding one-off items, for FY18-19. 
• We assume a constant 25% for the next three years. At its current share price, we forecast decent yields of 2.5-3.3%.

VALUATION & RECOMMENDATION

• Our valuation captures projects with a stake-adjusted value of SGD11b. Our Target Price of SGD0.56 is pegged at a 20% discount to our RNAV of SGD0.71. This is the same discount we apply to other mid-cap developers, GuocoLand and Bukit Sembawang, but is wider than our discounts for the large-cap Singapore proxies of City Developments and UOL. We believe its sector-leading ROEs, income visibility from SGD1.7b of unbilled sales and well-timed land acquisitions offset negatives from elevated financial leverage and lower stock liquidity.
• Singapore residential. We have assumed ASPs of SGD1,400-2,150 psf for its residential projects. Notably, its JV projects in north-eastern Singapore, Rio Casa and Serangoon Ville, are valued at SGD1,400 and SGD1,600 psf respectively. ASPs for The Verandah and Vista Park, projects on the west coast, are assumed at SGD1,820 psf and SGD1,900 psf. Mayfair Gardens is valued at SGD2,150 psf.
• Singapore commercial. We value Chevron House at SGD2,650 psf after its AEI, using an office cap rate of 3.75%. This is slightly higher than the 3.5% we apply to most leasehold offices, reflecting Chevron House’s shorter remaining land tenure. Oxley’s hotels on Stevens Road are valued at SGD1.2m per key, assuming a stabilised cap rate of 3.75%.
• Overseas. While company disclosures indicate a combined GDV of SGD10b for its overseas developments on a stake-adjusted basis, we believe the market is unlikely to price them in fully. This is due to a lack of visibility of development details and timing. Nonetheless, we expect the market to focus on eight projects in the UK, Ireland, Malaysia, Cambodia and China with an aggregate value of SGD6b. This is due to their better development visibility.

Derrick Heng CFA Maybank Kim Eng | https://www.maybank-ke.com.sg/ 2018-06-01

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