Oxley Holdings - UOB Kay Hian 2019-10-25: Impeccable Track Record


Oxley Holdings - Impeccable Track Record

  • Oxley trades at an attractive 52% discount to our S$0.72 RNAV (0.9x P/B), from undue “overhang” of cooling measures and gearing concerns. Much less appreciated is the group’s stellar Singapore residential sales (about 63% sold) and S$3.9b unbilled sales (vs S$3.1b net debt). The group also had a demonstrable 22% ROE (peer average: 7%) in 2014-18, enabled by its fast turnaround, astute land-banking and leverage.
  • Resume coverage with BUY and target price of S$0.50, pegged at a 30% discount to RNAV.

Oxley's Company Background

  • OXLEY HOLDINGS LIMITED (SGX:5UX) was incorporated on 16 Mar 10. Headquartered in Singapore, the group is a property developer specialising in development of residential, commercial, industrial and hospitality projects. Oxley was first listed on Catalist Board of SGX-ST in Oct 10, before transferring to the Main Board of the SGX-ST on 21 Feb 13. It currently trades at S$1.3b market cap.
  • Oxley also has a geographical presence in 11 countries (e.g. Singapore, the UK, Ireland, Cambodia, Malaysia, Myanmar, Vietnam, China and Cyprus).
  • Oxley is majority owned by CEO Ching Chiat Kwong (42%), Deputy CEO Low See Ching (28%), and substantial shareholder Tee Wee Sien (11%). Recent share placements in Oct 17 (22.7m shares@S$0.59/share) and Mar 18 (156.8m@S$0.51/share) have helped to improve liquidity and enlarge free float to the current 18.6%, which should renew investor interest.
  • See Oxley Holdings Announcements; Oxley Holdings Latest News.

Acquired remaining 60% of Pindan.

  • Pindan Group (Pindan) became a wholly-owned subsidiary of Oxley on 7 Oct 19, when the remaining 60% of their shares were acquired by the group for zero consideration after Pindan failed to meet performance targets. Prior to this acquisition, Oxley held a 40% interest in the Perth-based company as part of its plan to enter the Australian property sector.
  • According to management, Pindan has put in place new top management personnel with relevant industry expertise which will help the business in terms of property development and management, fund management as well as construction.

Other listed investments.

  • Oxley owns 19% of United Engineers (SGX:U04) (accumulated at S$2.65-2.82 levels since Aug 17) which develops and owns iconic buildings such as UE Square, UE Bizhub Tower and Rochester Mall.
  • United Engineers has been suspended from trading on 21 Oct 19, after Yanlord Land acquired the United Engineers stakes of Perennial and Heng Yue (via their 51% stake in the Offeror), which holds 35.27% of United Engineers ordinary shares and 97.71% of United Engineers preference shares, as well as 29.9% of the ordinary shares of WBL Corporation. As a result, Yanlord Land (SGX:Z25), via the Offeror, has made a S$2.60 offer as required for all of United Engineers ordinary shares, conditional it upon resulting the Offeror to holding more than 50% of the total voting rights. Yanlord Land noted, they do not intend to delist/privatise United Engineers. See Yanlord Announcements. The offer price implies a 0.9x P/NAV, which is in line with average transaction multiple of some selected Singapore-listed developers (ie from 2013-18). At the time of writing, the United Engineers offer still sits comfortably within the minimum 28 days of acceptance (i.e. earliest closing 22 Nov 19). See United Engineer Announcements; United Engineer Latest News.
  • Another investment is a 10% stake in Aspen Group (SGX:1F3) (which was acquired for more than S$23m), a property developer in Malaysia that develops affordable residential and mixed development properties targeting the mass market.

Singapore development portfolio estimated at S$4.9b GDV.

  • Oxley has 11 projects under development in Singapore. As at Aug 19, 10 of the 11 developments had been launched. Oxley has secured S$2.7b sales, leaving S$2.2b est. GDV to be launched.

Overseas development portfolio estimated at S$19.1b GDV.

  • Oxley has 20 projects under development across nine countries, including the Gaobeidian township development project which is proving to be a huge jackpot. As at Aug 19, 7 of the 20 developments had been launched, securing S$4.8b sales. The group still has about S$14b remaining GDV to be launched.

Oxley's Investment Highlights

Strong earnings visibility from diversified base; spreads out local regulatory risks.

  • Oxley has a diversified earnings base with S$3.9b of S$7.5b in secured development sales yet to be recognised, spread across Singapore (56%), the UK (15%), Ireland (15%), Cambodia (11%), Malaysia (2%) and Indonesia (1%). The diversified exposure helps the group balance the risk of changes in local government measures.
  • Oxley also has remaining unsold GDV of about S$16.5b, which can contribute to its future growth.

Singapore residential sales (about 63% sold ytd) to remain stellar, thereby transferring holding risk to buyers.

  • As of end-Sep 19, Oxley had sold about 63% of its 2,226 attributable units (total: 3,814 units/est. GDV: S$4.86b). Certain projects (eg The Verandah Residences, Sixteen35 Residences, Sea Pavilion Residences) are completely sold. Some of the mega launches, like Affinity At Serangoon (1,052 units) and Riverfront Residences (1,472 units), have also achieved respectable take-ups of 56% and 77% respectively, crossing the 30-40% benchmark (when most projects become self-financing).
  • Management expects sales to reach 70% of the total by end-19, and sell out the remainder within 12-15 months. We believe this is achievable, given the current sales momentum (ie about 3% of their Singapore inventory are moved on average each month, since the start of 2019).
  • Upcoming nearby rival launches are also expected to draw a new wave of buying interest to Oxley’s more attractively-priced projects. Sengkang Grand Residences has indicative prices set at about S$1,700psf, much higher compared to Oxley’s Riverfront (ASP: S$1,314psf) and Affinity (ASP: S$1,506psf). Royal Green (launch weekend ASP: S$2,750psf) is also priced significantly higher than Oxley’s MayFair Gardens (ASP: S$1,881psf), based on REALIS caveats retrieved on 14 Oct 19.
  • The recently-announced draft Master Plan is expected to inject a new investment angle to several of Oxley’s projects, such as Mayfair Gardens/Modern (five-minute walk from the future integrated transport hub) and Affinity (four minutes away from the upcoming Serangoon North station).

Gearing concerns overblown; subsides on project completions and potential hotel sale.

  • Oxley's net gearing has decreased steadily (from the high of 6.22x in FY10) to 2.05x in FY19, and is yielding positive operating cash flow for the first time in recent years of S$328.6m, S$461.3m and S$115.1m in FY16, FY17 and FY18 respectively.
  • We expect the group to de-gear further, as debt is paid down with the completion and handover of development projects. As at end-Aug 19, total sales secured for the group’s development portfolio amounted to S$7.5b, including S$3.9b in future progress billings for Singapore and overseas projects. Of this, future progress billings from overseas projects (S$1.7b), like Royal Wharf, Dublin Landings, The Peak, Oxley KLCC, are proven (in terms of revenue recognition and cash collection in the past). The remaining S$2.2b in Singapore progress billings are also unlikely to see any drop-offs (given the progressive payment scheme where 20% of the purchase price is committed at the point of booking a unit).
  • Oxley acted swiftly when opportunities arose to reduce gearing in times of global market uncertainties, with the disposal of Chevron House as part of the plan to boost cash flow. Another potential asset sale is Novotel & Mercure Singapore on Stevens (totalling 772 rooms, 11 commercial units), which has an indicative valuation of S$1.053b. Management may revisit sale of the hotel if there are good offers in 2020 (given that the supply situation may tighten then on the back of more regional events in even years (eg 2020 and 2022). Land tenure of Novotel & Mercure Singapore on Stevens has also been converted to freehold, which will further increase its appeal to buyers.
  • Amid signs of increasing investor interest in Singapore hotels, cap rates have also compressed in the past financial year (declining from 4.50% to 3.25%, based on valuers’ input in their FY19 annual reports).

Astute land-banking (from 2017) sets Oxley apart.

  • The early-mover advantage gave the group more room to manoeuvre, in terms of pricing, commission and fast-tracking of launches ahead of competition, while still maintaining healthy margins. Some of these sites acquired on the cheap (vs later transacted prices in the vicinity) include Rio Casa at S$669psf (21% less/Florence Agency: S$842psf), Serangoon Ville at S$835psf (13% less/ Serangoon North GLS site: S$964.80psf) and Mayfair Gardens at S$1,244psf (32% less/ Crystal Tower: S$1,840psf).
  • Based on channel checks, some of Oxley’s projects offer higher commissions (eg 4%) at the higher end of market norms of 2-4%, and faster payouts (ie 1% advanced commission within 24 hours of closing a deal) to incentivise agents.

Largest SGX beneficiary in Gaobeidian project.

  • Oxley’s 27.5% stake (the largest among SGX peers KSH Holdings (SGX:ER0): 22.5%, Lian Beng Group (SGX:L03): 10%, Heeton Holdings (SGX:5DP): 7.5%) in Gaobeidian is proving to be a massive jackpot, as it is located just 40km north of the recently-announced Xiongan New Area (XNA) Special Economic Zone. 31 major SOEs are reportedly planning to develop their businesses in XNA.
  • The Gaobeidian project is a S$4b GDV township development (comprising hospitals, schools and residential components) that will be progressively launched. An estimated total 50,000 residential units are planned. Of this, some 800 units will start launching this month (Oct 19), and management remains optimistic on the take-up.

Strong insider buying from management signals value.

  • Over just a 12-month period, S$34.7m worth of shares have either been bought or elected to be received as scrip dividends by insiders, signalling insider management’s confidence in Oxley’s prospects and strong intrinsic value at current share price(s). CEO Ching Chiat Kwong bought about 71.0m shares (average cost of S$0.293/share), while Deputy CEO Low See Ching bought about 47.2m shares (average cost of S$0.318/share).
  • See Oxley Holdings Announcements; Oxley Holdings Dividend History.

Oxley's Valuation

Significantly undervalued; trading at deep 52% discount to our RNAV of S$0.72.

  • We believe the negative overhang from Singapore’s property cooling measures (Jul 18) and doubts over its high gearing (debt repayment ability) have weighed on Oxley’s valuation. Much less appreciated is its high cash flow visibility from S$3.9b unbilled sales (vs S$3.1b net debt), including strong Singapore residential sales (63% of attributable units are sold), which effectively transfers holding risk to buyers. With that, we believe a narrower discount of 30% is more justifiable, implying a S$0.50 target price (with 46% upside). See Oxley Holdings Share Price; Oxley Holdings Target Price.
  • We estimate RNAV of S$0.72/share for Oxley, comprising surplus to book of investment properties (S$108m), NPV of development profits (S$1,347m), surplus to book of listed associates (-S$28m), and current net book value (S$1,507m). In total, the company has disclosed a combined S$24b estimated total GDV (before stake adjustment), comprising of Singapore (20%) and overseas projects (80%).

Consistently sector-leading average ROE of 22%

  • Consistently sector-leading average ROE of 22% (in 2014-18) is superior to peer average of 7% (excluding Consistently sector-leading average ROE of 22%). Much of the outperformance is due to higher leverage at 6x (vs peer average of 2x), while its ROA of 3.8% is largely in line with peers’ (3.5%). Oxley also grew BVPS at a 22% CAGR (vs peer average of 5%) over the same period.
  • See Oxley Holdings Analyst Reports.

See attached 19-page PDF initation coverage report for complete analysis and also the listing of Oxley's development portfolio as well as its investment and hospitality portfolio.

Loke Peihao UOB Kay Hian Research | Nicola Ho UOB Kay Hian | https://research.uobkayhian.com/ 2019-10-25
SGX Stock Analyst Report BUY INITIATE BUY 0.50 SAME 0.50