Oxley Holdings - UOB Kay Hian 2020-04-13: A COVID-19 Survival Plan

OXLEY HOLDINGS LIMITED (SGX:5UX)

Oxley Holdings - A COVID-19 Survival Plan

Heading into a potentially prolonged COVID-19, the key risks for Oxley Holdings (SGX:5UX) are construction delays and completion risk. We believe the group has sufficient liquidity to cover all non-rollover maturing debt in 2020, despite its high net gearing (1.94x).
Management has prioritised completing projects with high handover likelihood, and halted new construction sites to conserve cash.

Maintain BUY with a lower target price of S$0.48 (previously S$0.50), pegged at 30% discount to RNAV.

In a teleconference call on 8 Apr 20, Oxley Holdings's management stated that it see the crisis possibly prolonged, posing risks in terms of construction delays and completion. To conserve cash, the group will not be starting any new construction sites (eg Connolly Station, Deanston Wharf), but will prioritise completing projects with most pre-sales and high handover likelihood.

Royal Wharf (95% sold), Dublin Landings (99% sold) and The Peak (79% sold) are prioritised for completion, which could potentially bring in S$704m unbilled sales (effective stake) before netting off any project debts. For Royal Wharf, management is expecting a three-month delay due to lower site efficiency on the back of social-distancing rules and a smaller staff strength (35% of usual level). Management opined that drop-out rates should be low (due to affordability of their mass-market product), which can also be easily replaced by purchasers from the UK government’s Help to Buy ownership scheme.
Meanwhile, completion of Dublin Landings will be delayed by an estimated 2-3 months, due to constrained supply trade and a three-week shut-down order. However, management is assured of follow-through from the buyer Greystar Europe, which is a pension fund with a long-term horizon.
As for The Peak, management opined that its retail mall/residential tower1/tower2 are on track for completion by Jun 20/Sep 20/Dec 20, and are unlikely to face a shut-down situation in Cambodia. Handover risk is also deemed to be low, as pre-sold units have secured a forfeitable 50% down-payment.

COVID-19 may result in a one-month construction delay; sales target to remain at 95-100% by end-20. As at end-Mar 20, Oxley had sold over 2,848 units (73%) of SG inventory.
Buying interest is returning to existing projects, as new launches cannot proceed with show flat closures under partial-lockdown. Some buyers have also reduced their budget, coming to the mass-market range by Affinity and Riverfront.

In terms of construction, the partial lockdown (7 Apr-4 May 20) in Singapore will result in at least one-month delay for the four projects nearing TOP in 2020, namely The Verandah (S$164m), The Addition (S$17m), Sea Pavilion (S$19m) and Sixteen35 Residences (S$38m), totalling S$238 in unbilled sales (by effective stake).
For both Affinity at Serangoon and Riverfront Residences, management is hopeful that the lost time can be recovered, as completion is still two years away in 3Q22. Affinity at Serangoon and Riverfront Residences are also built by the respective JV partners Lian Beng (SGX:L03) and KSH Holdings (SGX:ER0), so management is assured their interests are aligned in allocating more resources to catch up with any delay.

Despite virtually no inbound travellers to Singapore, Oxley’s SG hotels will run at 100% occupancy for 1-2 months housing quarantine residents for their two weeks’ isolation. Although lower room rates are charged, this is more than offset by a lower cost of operations, from cutting out online travel agents (eg Booking.com), reduced housekeeping (due to social distancing), and less food wastage (from pre-selection of food menu).

Management alluded that the potential buyer remains keen, but due diligence has been delayed resulting from the partial lock-down. If the retail and banking units can be sold by 30 Jun 20, Oxley will receive inflows of S$295m (subject to certain adjustments, based on the selling price achieved). Otherwise, Oxley will still get to buy the asset from AEW at a very steep discount.
Even in a no-deal scenario, Oxley can put up the asset for a 60-65% LTV financing with banks (and after netting off the discounted purchase price), which will still add positive FCF to the group.

For 2020, Oxley has S$833m of maturing debt, but only the corporate debt and bonds portion totalling S$328m cannot be rolled over. As for the remaining debt, Investment Property Loan (S$321m) can be re-financed, while project debt needs repayment only on project completion.
The S$328m non-rollover obligations in 2020 can be more than covered by S$395m liquidity sources, based on S$323.8m cash balances as at 31 Dec 19 and S$75m inflows from bonds priced at 6.5% issued in Feb 20, after netting off S$3.7m used for share buybacks (24 Mar 20 ytd).

We lower our 2020-22F net profit estimates by 0-20%, to account for slower construction progress for its Singapore (0-2 months) and selected overseas projects (2-3 months), and deferred starting of new construction sites.

Maintain BUY with slightly lower target price of S$0.48/share, pegged at a 30% discount to our revised RNAV of S$0.69/share.
See Oxley Holdings Share Price; Oxley Holdings Target Price; Oxley Holdings Analyst Reports; Oxley Holdings Dividend History; Oxley Holdings Announcements; Oxley Holdings Latest News.
During Mar 20, Oxley's share price saw a 33% correction. We attribute this to concerns over a deterioration in book value, especially for the higher beta segments, namely hotel (10% GAV) and residential (50% GAV) which could be affected by low demand if the COVID-19 outbreak leads to a prolonged economic downturn.However, the share price correction appears overdone in our view.
Recent share buybacks between 28-Feb to 24-Mar 20 by the company and its founders, totalling 18.1m shares (averaging S$0.20/share) and 11.5m shares (averaging S$0.24/share) respectively, potentially signals confidence and value at current trading levels.

Loke Peihao UOB Kay Hian Research | Nicola Ho UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-13

SGX Stock Analyst Report BUY MAINTAIN BUY 0.48 DOWN 0.490