Roxy-Pacific Holdings - DBS Research 2018-07-06: Back To The Drawing Board

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ROXY-PACIFIC HOLDINGS LIMITED SGX: E8Z

Roxy-Pacific Holdings - Back To The Drawing Board

• The authorities surprised the market with the hike in ABSD and tightening of mortgages, just over a year after the authorities relaxed policy measures.
• Buyers’ sentiment will be impacted.
• Small and nimble could benefit Roxy.
• Downgrade to FULLY VALUED, lowered Target Price to S$0.45.

Downgrade to FULLY VALUED; lowered Target Price to S$0.40.

• We downgrade Roxy-Pacific to FULLY VALUED from BUY and lowered our Target Price to S$0.40 (previously S$0.69) on a higher 55% discount to RNAV from 30% previously.
• The surprised move by the authorities in hiking ABSD rates and tightening mortgages (just over a year after the authorities relaxed the policy measures) will hit buyer sentiment significantly.

Where we differ. Buyers’ sentiment impacted but small and nimble Roxy could still benefit.

• Despite the strong sales take-up rates of its property launches thus far, we believe the change in buyer sentiment could still have an impact Roxy-Pacific’s new property launches. 
• Although its landbank is typically smaller in size, Roxy-Pacific still has quite a few projects which were previously scheduled to be launched in 2018 / 2019. However, we believe being nimble in times like this is a plus.

Potential catalysts:

• Property sales remaining strong despite expected change in sentiment from recent cooling measures.

Beefing up its recurring-income portfolio.

• In FY17, Roxy-Pacific had acquired four new commercial buildings in Australia / New Zealand and one hotel property in Japan. io. Its investment property portfolio has grown close to three-fold to S$330m. These properties will start contributing in FY18, thus raising contributions from investment properties to 35% in FY18F from 20% in FY16.

Valuation:

• Downgrade rating to FULLY VALUED from BUY previously. 
• Our Target Price of S$0.40 is based on a higher discount to RNAV of 55% from 30% previously.

Key Risks to Our View:

1. Slower take-up rates,
2. Government regulates more to manage the Singapore property market,
3. AUD / NZD / JPY forex fluctuations, and
4. acquisitions of less-desirable investment properties.

CRITICAL DATA POINTS TO WATCH

Launching nine freehold residential projects in Singapore in 2018 / 2019.

• As developers rushed to landbank, Roxy-Pacific can reap the benefits of being one of the earliest to landbank among the mid-to-small-cap developers. It had successfully launched 3 to 4 residential properties which have garnered strong take-up rates prior to the authorities implemented tightening property measures.
• While future property launches could be impacted by a change in buyers’ sentiment, we believe Roxy, having smaller plots of land could be a plus as they stay nimble in uncertain times such as this.

Beefing up its recurring-income portfolio.

• Since the slowdown of the Singapore property market in 2013, Roxy-Pacific started to venture out of Singapore and expanded its horizons to build its portfolio of assets to improve recurring income and provide earnings stability. io. In FY17, Roxy-Pacific 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, a commercial building).
• 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. These properties will start to contribute from FY18 onwards.

Realisation of development projects in Australia upon completion.

• Roxy-Pacific’s investments in development projects in Australia in 2015 will soon pay off when five projects are completed by 2018. The projects have all been substantially sold (95% sold) except for the last project launched in 3Q17, Art House at West End Glebe. The units sold have a total sales value of approximately S$300m and could potentially contribute 21% to 44% of FY18F-FY19F earnings.

Balance Sheet:

Undervalued Net Asset Value (NAV).

• Roxy-Pacific’s NAV is conservative largely because the carrying values of its hospitality portfolio is at historical cost. In addition, development properties comprise close to 60% of its total assets, which typically offer more upside upon the realisation of these development properties. io. Its RNAV is more than double its current NAV.

Net debt to equity stood at 1x in FY17.

• Roxy-Pacific’s net debt to equity stood at 1x as at end-FY17. We expect the ratio could increase to 1.7x following landbanking / development activities, and acquisitions of investment properties in FY18. While it may seem high, its NAV could be conservative as mentioned above. The group’s net debt to adjusted NAV (ANAV) stood at 0.6x as at FY17.

Share Price Drivers:

Sustainable sales take-up rates despite cooling measures.

• Despite the authorities implemented property cooling measures, if sales take-up rates remain sustainable, this would boost confidence and ensure sustainable profitability in its development properties. Depending on the prices, it is also a testament that the market is receptive of higher property prices.

Beefing up its recurring income portfolio.

• Improvement in office rental rates of its office properties and positive asset recycling will boost investor’s confidence on the capabilities of management in managing and building s sustainable reucrring income portfolio for more income stability.

Key Risks:

Slower take-up rates.

• With six developments expected to be launched in FY18, slower take-up rates for its properties would impact the need for more financing, thus, increasing its cost. In addition, Roxy-Pacific has the five-year timeline to complete its sales before the ABSD and QC charges kick in.

Government regulates more to manage Singapore property.

• Despite the multiple ‘warnings’ by the authorities to be cautious of excessive exuberance in the property market, the land bids and the property market have remained robust and bullish. We remain cautious that the authorities may decide to implement more measures to ensure that the Singapore property market remains sustainable in the medium term and that it doesn’t become a “runaway train”.

Rachel TAN DBS Group Research Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-07-06

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