Oxley Holdings: Credit Update and Potential New SGD Bond Issue

What's happening?

Earlier this week on Monday, Oxley Holdings Limited held a series of investor meetings to provide some updates about the company’s operations and financials, and discuss about the possibility of tapping the SGD bond market. Both Oxley’s CEO Mr Ching Chiat Kwong and Deputy CEO Mr Eric Low were present for the meeting. In this update, we provide some takeaways from the meeting, highlight the credit outlook of Oxley, and guesstimate the appropriate pricing range for a potential new bond issue by Oxley.

Lower 1H18 earnings due to revenue recognition of Oxley Tower in previous year

Oxley reported total revenue of S$716.7m its 1HFY18 ended December, which was 2% lower than the S$732.2m posted in the previous corresponding period. Revenue during the period comprised of sales recognition upon the handover of completed units in the Royal Wharf Phases 1A and 1B, progress on construction from two mixed-residential projects in Singapore (Floraville/Floraview/Floravista and The Rise @ OxleyResidences), and rental income from investment properties and service income from hotel operations. The slight drop in 1HFY18 revenue was largely due to previous year’s revenue recognition upon the completion of Oxley Tower in December 2016. Other performance detractors include a fair value loss of S$16.9m (in 2QFY18) on its marked-to-market financial instruments, and the significantly lower margins of The Royal Wharf project vis-a-vis the Oxley Tower project. These were mitigated by Oxley’s share of profit from equity-accounted associates and joint ventures of S$74.8m for 1HFY18 (1HFY17: S$3.6m loss), mostly contributed by a joint venture project in Cambodia (The Bridge) and the Galliard Group. As a result, net profit fell 18% YoY to S$114.2m in 1HFY18 from S$138.5m in 1HFY17.

Strategic return to Singapore

Recall that we have previously highlighted that prior to 2017, Oxley's exposure to Singapore as measured by its project pipeline has diminished over the years. Last year marked the return of Oxley to Singapore in a big way, as the company executed a number of acquisitions in the city-state. These include additions to its development portfolio such as Rio Casa for S$575m (35% stake), Serangoon Ville for S$499m (40% stake), Vista Park for S$418m (100% stake), Mayfair Gardens for S$311m (100% stake) and Lotus @ Pasir Panjang for S$121m (100% stake). At the end of 2017, Oxley has a landbank of approximately 3,800 units with an estimated gross development value of S$4.9 billion (see Table 1) to be launched. According to executive chairman and CEO Mr Ching, the word on the street is that Oxley now has the largest landbank in Singapore.

The prices paid by Oxley for the aforementioned acquisitions seem reasonable relative to recent transactions. For instance, Allgreen Properties in December bought three land parcels (Royal Ville, Crystal Tower and 4th Avenue GLS) that are comparable to Mayfair Gardens, at an average bid price of S$1,800 per square foot per plot ratio (psf ppr). Based on the S$1,244 psf ppr rate paid by Oxley for Mayfair Gardens, the company has a cost advantage of ~S$556 psf ppr for the development. Management highlighted that these cost advantages come from their being one of the first movers to recognize the rebounding Singapore property market, and will allow the company to launch their projects at very competitive pricing. Management added that they have been patiently waiting for this current upturn in the Singapore property market, and they think this will be a very exciting period for Oxley, as the company is targeting to launch all of the aforementioned new projects during March to August.

Table 1: Oxley's Singapore development portfolio

Recurring income to form a substantial portion of revenue

Oxley has been expanding its investment and hospitality portfolio. In the commercial space, Oxley has acquired Chevron House for S$660m and a 15% stake in United Engineers Limited (UEL) for S$255m. The latter investment provides the company access to UEL’s property portfolio (includes UE Square, UE Bizhub Tower and Rochester Mall), which management felt was undervalued based on UEL’s market valuation. In FY17, revenue from Oxley’s investment properties amounted to just S$10.9m while the company’s hotel assets did not generate any revenue. However, the addition of Chevron House is expected to contribute an additional S$41m of recurring income a year. Also, Ireland’s National Treasury Management Agency has agreed to take up 83,000 sq ft in Dublin Landings and will move in by summer 2018.

In the hospitality space, Novotel/Mercure Singapore on Stevens has commenced operations in the fourth quarter last year, and Oxley expects the two hotels to generate S$46m of recurring profit based on 88% occupancy rate. The leasing operations of eleven commercial units on the same site have also commenced in October 2017, and are expected to contribute S$2.1m per annum. Besides Singapore, Oxley is building hotels in Malaysia, Cambodia and Cyprus, By FY2021, the company expects its portfolio of investment properties to deliver S$265.8m revenue p.a. (see Chart 1). Management highlighted that the strong recurring revenue stream should provide more income stability, and they expect overall revenue to be more consistent moving forward, in the range of S$300-400m a quarter.

Chart 1: Oxley's projected recurring revenue stream

Strong sales ability provides earnings and cash flow visibility

The major credit positives of Oxley are its decent profitability and high earnings visibility. With strong pre-sales, the value of the company’s projects that are sold but not booked as revenue yet stood at S$1.80 billion at the end of December. Among these, the projects which are expected to obtain their Temporary Occupation Permit (TOP) in the next twelve months have an unbilled contract value of S$1.13 billion. The substantial amount of unbilled contract provides a high level of earnings and cash flow visibility going forward.

During the meeting, Management said that cash flow management is one of their top priority, and this is evidenced by the company’s healthy cash flow from operations in recent years (see Chart 2). With Oxley’s relatively strong cash flows, management thinks it will be easy for them to pare down debt in the future if they choose to. They are also confident that given the company’s cash flow profile, it will not have any problems meeting its near-to-medium term debt obligations.

Chart 2: Oxley’s cash flow from operations (S$m)

Leverage improved but looks set to go higher

We have previously predicted in several articles since September 2016 for Oxley’s credit metrics to improve. And this has been proved correct as the company’s net gearing (net debt/equity) fell to 1.87x in 2QFY18 from 2.08x at the end of June (4QFY16: 2.50x). Debt/capital similarly improved albeit gradually to 0.68x from 0.69x over the same period (4QFY16: 0.73x). However, this deleveraging trend looks set to reverse its course in the coming year. Management guided that based on the company’s existing project pipeline and the remaining consideration of S$627m payable for Chevron House (scheduled to complete in March), they expect to take on incremental borrowings of up to S$1 billion, which is hefty in our opinion relative to the existing debt of S$2.55 billion (as of 31 Dec 17). With this information, we estimate net gearing to jump to an elevated 2.70x in the near term, a gearing level that would make us nervous. Nevertheless, we understand from management that they expect the heavy near-term financing needs to be mitigated by their estimated revenue of S$1.5 billion (which is estimated to yield ~S$400m net income) in the coming twelve months. Based on management’s projections, they are hopeful that net gearing can at least stay at its current level by end-2018 or early-2019.

Given Oxley’s strained credit metrics, it was unsurprising that most of the questions raised during the meeting were regarding the company’s balance sheet management and financial flexibility. We took comfort from management’s assurance that they are committed to deleverage, and Oxley has stretched its balance sheet in 2017 (and likely this year as well) because they have sensed a good run coming in the Singapore property market and decide to seize the opportunities they see. Management added that if not because of the good market environment and the opportunities it present, the company’s net gearing would likely be nearer to 1.5x than the current 1.9x. Deputy CEO Mr Eric Low also mused that Oxley’s risk propensity has gone down over the years as age catches up with him and Mr Ching. To recap, the two partners together own 71.4% of the Oxley shares.

On Oxley’s financial flexibility, management advised that they always have the option to sell the investment properties (S$579.4m as of 31 Dec 17) if needed. Furthermore, most of the company’s overseas land parcels are unencumbered, which provide another source of buffer for meeting debt obligations. Management also pointed out they have been increasingly adopting an asset-light acquisition model, especially in the overseas markets. In this model, Oxley structured capital efficient deals with authorities or local landowners, which allow the company to commit lower amounts of capital while providing its development expertise. Finally, management highlighted that the company’s debt profile is carefully planned for the debt maturities to match project completions or handovers. They added that the relatively short turnaround (three-four years) and the progressive payment schemes for Oxley’s development projects in Singapore should help the company to pay off the additional debt.

On a potential new SGD bond

Based on the information we have gathered, Oxley is considering the possibility of issuing a new SGD senior unsecured bond with a tenor in the three-five year range, depending on market conditions. The bookrunners are still contemplating about the bond pricing, having sought feedback from investors. At the close of yesterday, the OHLSP 5.000% 05Nov2019 Corp (SGD) - Retail and OHLSP 5.150% 18May2020 Corp (SGD) - Retail were trading at YTM (ask) of 4.31% and 4.74% respectively, indicating spreads over SGD swaps between 281-315bps. Taking reference from the bond pricing of Oxley’s outstanding SGD bonds, and adding a 50bps spread for the new issue premium and anticipated rising leverage in the near future, we think the upcoming Oxley new issue should price in the 5.02-5.35% range for a three-year tenor, or 5.27-5.60% for a five-year maturity. If the final pricing falls between our estimates, it would place the new Oxley bond amongst the highest-yielding SGD-denominated bonds in the real estate sector, and provide a reasonable compensation for the company’s credit risk.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) has a principal position in OHLSP 5.000% 05Nov2019 Corp (SGD) - Retail and OHLSP 5.150% 18May2020 Corp (SGD) - Retail. The analyst who produced this report holds a NIL position in the abovementioned securities.