Oxley Holdings: Strategic Return to Singapore

Decent set of financial results

Oxley Holdings, a property developer listed on the Singapore Exchange (market capitalisation S$1.653 billion, as of 13 Sep 17), announced in late August a decent set of financial results for FY17 (financial year ending 30 Jun 17). Driven by revenue recognition from several commercial and mixed-residential projects in Singapore, sale of the mixed-residential development at Joo Chiat Road and handover of certain plots in The Royal Wharf Phase 1A, revenue jumped 37% YoY to S$1.3 billion in FY17 from S$981m a year ago. Cash flows improved strongly for the second consecutive year as Oxley generated S$382m in adjusted cash from operations (FY16: S$243m). Net profit fell 23% to S$227.7m in FY17 from S$295.4m, but that was mostly due to lower fair value gains on investment properties of S$16.3m (FY16: S$76.4m), a one-off S$25.6m gain on disposal of a long-term investment in FY16, and a S$25.6m negative goodwill gain on a bargain purchase in FY16. Profit after tax and minority interests increased by 6% to S$218.1m in FY17 from S$206.0m a year ago. The strong profitability expanded Oxley's total equity to S$1.1 billion, which has grown almost eight times from S$137m in FY11.

Deleveraging Trend

As we have projected in several articles since September last year (see 3 Reasons Why Oxley Holdings' 6.375% 2021 USD Bonds are a Buy, Oxley Holdings Ltd: Reiterating Our Top SGD Retail Bond Pick, and Oxley Holdings Ltd: High Yield Retail Bond Opportunity?), Oxley's credit metrics have improved further in its latest financial year. Previously a highly-levered company with net gearing (net debt-to-equity ratio) hovering around 4.0x in FY13-14, Oxley's gearing has reduced steadily to 1.9x at the end of June 2017, from 2.2x in FY16 and 2.6x in FY15 (see Chart 1). Similarly, the company's debt-to-asset ratio has gradually fallen to 53.3% in FY17 (FY16: 56.1%) from 66.9% in FY14. Furthermore, with its strong cash flows and earnings visibility from its unbilled contracts (S$2.46 billion as at 30 Jun 17), Oxley should not have any issues meeting the interest expenses on its borrowings. The company's adjusted interest coverage ratio (EBIT/interest incurred) was 3.4x in FY17, a significant improvement from the 2.6x recorded a year ago. Moving forward, we expect Oxley's deleveraging trend to continue, supported by the high cash flow visibility, increasingly asset-light operating model, and the company's seeming gravitation towards a more-conservative financing policy (Oxley cut its total dividend to S$43.9m in FY17 from S$55.9m in FY16, despite a strong set of results).

Chart 1: Oxley's net gearing (FY ending June)

Back to Singapore

Some astute investors of Oxley might have wondered at the logic behind the statement "Oxley is back in Singapore" in the company's corporate presentation for FY17, as substantially all of the company's revenue since its listing in 2010 was contributed by property projects in Singapore. However, Oxley's exposure to Singapore as measured by its project pipeline has actually diminished over the years as it had not added to its land bank here while increasingly shifting its development efforts to overseas projects. The company now has a presence in 11 geographical markets around the world. 2017 however marked the return of Oxley to Singapore in a huge way, as the company's major acquisitions this calendar year were all based in the city-state. In May and June, Oxley led two separate consortiums in the en bloc deals purchasing Rio Casa for S$575m and Serangoon Ville for S$499m, respectively. In June, Oxley bought 213 Pasir Panjang road for S$121m. Last month, the company announced its acquisition of a 10% stake in United Engineers Limited, which subsequently was increased to 14.0%, according to Bloomberg data.

As at 30 Jun 17, Oxley had S$2.46 billion of unbilled contract that will be billed progressively, of which only 13.8% or S$339.8m was from Singapore (see Table 1). However, in terms of total estimated remaining gross development value (total estimated GDV minus sales secured), Oxley's development assets in Singapore (at S$3.3 billion) made up almost a quarter of its total development portfolio (S$13.1 billion). These are largely contributed by the company's new acquisitions mentioned earlier, with Serangoon Ville and Rio Casa estimated to have GDV of S$1.3 billion and S$1.4 billion respectively.

Table 1: Oxley's development portfolio

High Earnings and Cash Flow Visibility

With strong pre-sales, the value of Oxley's projects that are sold but not booked as revenue yet stood at S$2.46 billion at the end of June. Royal Wharf, a 363,000 sqm waterfront township development in East London along River Thames, is expected to contribute significantly in the near to medium term, with an unbilled contract value of S$1.7 billion as at 30 Jun 17. In addition to the strong earnings visibility over the next few years as Oxley completes its projects and recognize the revenue, the company is also seeking to increase its recurring income stream. The opening of two hotels (Novotel Singapore and Mercure Singapore) later this year should give a significant boost to Oxley's recurring income. Management is projecting the recurring income stream from its investment and hospitality properties to reach S$167.1m a year in FY21 from S$71.6m in FY18.

Even though the two Oxley SGD-denominated bonds have performed quite well year-to-date, we think the two bonds still provide pretty decent returns at current pricing. Both the OHLSP 5.000% 05Nov2019 Corp (SGD) - Retail and the OHLSP 5.150% 18May2020 Corp (SGD) - Retail are priced at a yield to maturity (offer) of 4.5% and 4.8%, respectively. Should Oxley's credit profile continue to improve as we anticipate it would, these two bonds may trade near the range of stronger credit names such as Perennial Real Estate Holdings Ltd and Guocoland Ltd. E.g. the trading yield of PREHSP 4.550% 29Apr2020 Corp (SGD) - Retail was 4.0% at the time of this writing, while GUOLSP 4.200% 05Feb2020 Corp (SGD) has a YTM of 2.8%. Lastly, as we have highlighted previously, we think the OHLSP 6.375% 21Apr2021 Corp (USD) provides good relative value versus the company's SGD issues. The pricing discrepancy we pointed out in the previous article still prevails today; the OHLSP 6.375% 21Apr2021 Corp (USD) currently trades at 6.3% YTM, offering a spread of 457bps over US risk free rates.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) has a principal position in PREHSP 4.55% 2020s, OHLSP 5.15% 2020s, OHLSP 5% 2019s and OHLSP 6.375% 2021s. The analyst who produced this report holds a NIL position in the abovementioned securities.