Roxy-Pacific Holdings - DBS Research 2019-08-02: Headwinds Remain In Sight

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ROXY-PACIFIC HOLDINGS LIMITED (SGX:E8Z)

Roxy-Pacific Holdings - Headwinds Remain In Sight

• ROXY-PACIFIC (SGX:E8Z)'s 1H19 net profit fell 27% y-o-y, mainly due to absence of fair value gains recognised in 1H18.
• 1H19 PBT (ex-FV) would have almost doubled y-o-y supported by settlement of Australian residential.
• Launched 5 out of 6 projects YTD with overall take-up rate of 16%.
• Declared interim dividend of 0.195 Scts, flat y-o-y.

Maintain HOLD; Target Price of S$0.39.

• We maintain our HOLD rating on ROXY-PACIFIC (SGX:E8Z) and Target Price of S$0.39, based on a 55% discount to RNAV.
• While we believe the potential headwinds from new property measures have been substantially priced in, we remain neutral and see limited catalysts for the stock and sector given a soft market sentiment.

Where we differ: Negative sentiment continues to weigh on property sales.

• Despite the decent sales take-up rates for its property launches thus far, with c.500 units launched YTD and overall take-up rates of 16%, we believe there could be limited positive catalysts given the softening buyer sentiment.

Potential Catalysts:

• Property sales to remain strong despite recent cooling measures; building up of recurring income.

1H19 results supported by settlement of Australia project, The Hensley.

• Roxy-Pacific's 1H19 net profit fell 27% y-o-y to S$9m, mainly due to the absence of fair value gains recognised in 1H18, offset by the recognition of the settlement of The Hensley project in Australia. Key highlights:
  1. launched 5 out of 6 projects with overall take-up rate of 16%,
  2. unrecognised sales stood at S$621m mainly from Australia and Singapore,
  3. acquired first Japan retail property at Ginza with potential positive reversionary in 2-3 years.

WHAT’S NEW - Headwinds remain in sight

1H19 net profit fell 27% y-o-y mainly due to the absence of fair value gains of asset divested in FY18 offset by settlement of Australia project.

• Roxy-Pacific’s 1H19 net profit fell 27% y-o-y to S$9m, 24% of our FY19F estimates, mainly due to the absence of fair value gains recognised from 117 Clarence Street, with the SPA agreement to sell the office building signed on 25 June 2018 and higher show flat expenses of S$4.2m (net of tax) with five property launches YTD. Excluding the fair value gains of S$9.9m, 1H19 PBT would have increased 95% y-o-y to S$11.7m.
• Roxy-Pacific's 1H19 revenue grew 68% y-o-y to S$140m, largely from development properties which more than doubled following the settlement of The Hensley project in Australia largely recorded in 1Q19.
• Roxy-Pacific's 1H19 adjusted EBITDA fell 4% y-o-y to S$28m. Excluding the fair value gains from 117 Clarence Street, 1H19 adjusted EBITDA would have grown 44% y-o-y mainly supported by recognition of the settlement of The Hensley project in Australia.
• Roxy-Pacific's 1H19 gross profit margin contracted to 27% from 33% in 1H18, due to
  1. lower margins of 20% on its development properties (vs 22% in 1H18), and
  2. change in portfolio mix which is now skewed towards development properties following the lumpy recognition of development projects, which have lower gross profit margins.
• However, we note that margins from hotel properties fell 3ppts from lower average room rate while investment properties improved 17ppts. This was due to the reclassification of lease payable on NZI Centre from cost of sales to other operating expenses under SFRS (I) 16 Leases effective 1 January 2019. 1H19 Adjusted EBITDA from investment properties (ex-fair value gains) grew 45% y-o-y.
• Roxy-Pacific has declared an interim dividend of 0.195 Scts per share, flat y-o-y.

Unrecognised sales stood at S$621m as at 2Q19.

• As at 2Q19, unrecognised sales stood at S$621m (from S$548m as at 1Q19), to be recognised from 2Q19-FY23. The unrecognised sales comprise largely those from Singapore (46%) following the multiple new launches YTD and its Australia properties (46%) which are expected to be completed in 2020/2021.

Take-up rates of three property projects launched YTD impacted by soft market sentiment.

• Roxy-Pacific launched five properties YTD out of its target of six property launches in FY19, before the ghost festival month. Roxy-Pacific managed to achieve an overall sales take-up rate of 16% from these new projects. Given the soft market sentiment, the sales rate of all ongoing projects has been decent with most projects achieving more than 15% sales take-up rates in a few months except two projects.
• We believe the company should continuously move sales through creative strategies. Roxy-Pacific has one remaining project, NEU at Novena, which is expected to be launched in 2H19.

Noku Phuket targets to open in FY21.

• The opening of its hotel in Phuket has been further delayed to FY21 from FY20 previously.

First acquisition of Japan retail property at Ginza.

• In June 2019, the group made its first acquisition of a Japan retail property at the heart of Ginza, together with other investors including Tong Eng Group. This further strengthens its recurring income portfolio. The building is currently under-rented with positive reversionary opportunity in 2-3 years’ time.

Maintain HOLD; Target Price of S$0.39.

• We maintain our HOLD rating on Roxy-Pacific and Target Price of S$0.39, based on a 55% discount to RNAV.
• While we believe the potential headwinds from new property measures have been substantially priced in, we remain neutral and see limited catalysts for the stock and sector given a soft market sentiment.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-08-02

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.390 SAME 0.390