Roxy Pacific Holdings Limited: Initiation Report

Business Model of Roxy Pacific Holdings Limited

Roxy Pacific Holdings Limited (‘Roxy’) is a small-sized property developer with a focus on the Asia-Pacific region. It was listed on SGX on 12 March 2008 with ticker code of (E8Z.SI). Today, it has grown to reach a market capitalisation of S$655 million. Roxy is helmed by the Teo family and its key management team has been running the company for more than 15 years. As a property developer, Roxy operates in the following segments of real estate:

For residential developments in Singapore and overseas markets, Roxy purchases the land and develops them into apartments or houses for sale. Revenue recognition for Singapore and overseas projects are based on percentage of completion and completion basis respectively. For its commercial properties, Roxy either develop them from scratch or buy completed buildings to hold for recurring income. For some of its hospitality projects, Roxy owns and operates them under the “Noku” brand.

Investment Merits of Roxy Pacific Holdings

1. Boost To Recurring Income

Given that Roxy has previously focused on residential developments, its revenue and earnings are rather lumpy as shown in Diagram 2. To reduce the “lumpiness” of the earnings from trading properties (eg: condominiums), Management is looking to increase the proportion of recurring income. In 2017, it has acquired 3 office buildings- 205 Queen Street, NZI Centre and 312 St Kilda Road. In 1Q2018, it will complete the purchase of Melbourne House. These purchases will provide stable gross income of approximately S$13 million per annum. It would more than replace the $8.8 million gross income lost due to the divestment of 59 Goulburn Street in October 2017.

2. Excellent Return on Equity

Roxy enjoys an excellent ROE that averaged 19% per year in the past 7 years. When viewed in context of the ROE of real estate developers, this was no mean feat. The average ROE of Roxy also surpasses the 12% ROE benchmark that Heartland Boy sets for all his stocks. Likewise, Roxy enjoys healthy net margins although this has trended down as a result of a slowing Singapore residential market during the last 3 years.

3. Insiders Are Buying

A quick research on Bloomberg and Yahoo Finance reveal that management has a high ownership in the company. The Teo family, either individually or via their shareholdings in investment vehicles such as Kian Lam Investment and Sen Lee Development Pte Ltd, collectively own over 61% of Roxy Pacific. In addition, the family has a direct equity stake in some of the projects (eg: Wilshere) that Roxy has undertaken. There is plenty of skin in the game for them as well. Hence, their interest should be strongly aligned with shareholders as a result.

More importantly, not long after the 4Q2017 results announcement, Kian Lam Investment purchased 200,000 shares at an average price of 56 cents each on 1 March 2018. That is clearly the greatest hint that the insiders believe that the shares are undervalued at today’s price.

Besides insiders, the company has also been relentlessly buying back shares from the open market. As recent as 6 March 2018, 200,000 shares were purchased at 55 cents per share.

Other shareholder-friendly actions include a proposed bonus issue of 1 bonus share for every 10 ordinary shares in the capital of the company. While a bonus issue does not increase the returns of shareholders, it should increase trading liquidity and potentially broaden the shareholder base.

Dividends have declined over the past few years and that is in line with the subdued Singapore residential market from 2013 to 2016. Based on a share price of 55 cents, the current dividend yield is 1.8%.

4. Competitive Advantage From Early Landbanking

In acquiring its landbank early and at competitive prices, Roxy managed to gain some form of competitive advantage over the rest of the developers. Heartland Boy has thoroughly reviewed 3 critical projects that will most significantly affect the fate of Roxy.

River Valley (Diagram 4)

1. Roxy acquired River Valley site in August 2017 at a land price of $1,582 per square foot per plot ratio (“psfppr”). The lease of the site is freehold.
2. Frasers Property won a government land sale tender of the former Zouk site (99-year leasehold) for $1,732 psfppr in December 2017. Do note that the zoning includes commercial use for the first storey. In general, land zoned for commercial use is more expensive than residential use.
3. The reserve price for the freehold Pacific Mansion is $1,728 psfppr. Tender for the en-bloc exercise will close in the middle of March. [Update: Guocoland paid $980 million in total, or 4.5% higher than the reserve price. This works out to $1,987 psfppr]

Assuming if the tender for Pacific Mansion closes at the reserve price, Roxy would enjoy a buffer of $145 psfppr on its land cost over that of its comparable located across the road. When multiplied against the gross floor area (“GFA”) of the project, this translates into an additional profit of $11.8 million. That is the advantage of securing a site in the earlier phase of this en-bloc wave currently sweeping the Singapore residential market.

Furthermore, if you consider that New Futura is fetching average selling prices of $3,200 psf, Roxy will enjoy a deep buffer on its land cost and a fat margin if prices hold for the next 2 quarters.

Derby Court (Diagram 5)

1. Roxy acquired Derby Court in December 2017 at a land price of $1,462 psfppr. The lease of the site is freehold.
2. Tee Land bought freehold Casa Contendere for a land price of $1,638 psfppr in November 2017.
3. The reserve price for the freehold Dunearn Gardens is $1,861 psfppr. [Update: EL Development bought it in April 2018 for $1,941 psfppr. This demonstrates the deep cushion that Roxy is sitting on for its land cost.]

It is evident that Roxy should be able to enjoy some buffer on its land cost compared to Tee Land. In addition, there could be some pent-up demand in Novena given the lack of new launches in the recent years. It will however be a tight race between the 2 developers to get their product on the market first to absorb this demand.

Lorong Kismis (Diagram 6)

1. Roxy acquired Lorong Kismis in January 2018 at a land price of $931 psfppr. The lease of the site is 99-year.
2. In a government land sales exercise, SP Setia emerged with a top bid of $939 psfppr for a 99-year site located at Toh Tuck Road in April 2017. The project has since been named Daintree Residence and is estimated to launch in the third quarter of 2018.
3. [Update: In March 2018, Qingjian paid $1,210 psfppr for freehold Goodluck Garden. In Heartland Boy’s view, that is a very high premium (30%) to pay to compensate for its freehold status. 15-20% would have been more reasonable and this goes to show that Roxy will enjoy some form of buffer on its land cost.]

The location of Roxy’s Lorong Kismis is marginally inferior to SP Setia’s (longer walking distance to main road). Therefore, it is quite credible that Roxy did not have to pay an inflated price despite purchasing the site 9 months after SP Setia clinched Daintree Residence during this en-bloc fever. In this context, Roxy probably paid a reasonable price for the Lorong Kismis site. However, SP Setia would have a first-mover advantage over Roxy.

5. Share Price Catalysts

Sizeable Singapore Landbank

Besides the 3 projects aforementioned, Roxy has accumulated a portfolio of 10 residential sites in its Singapore land bank. With the exception of Lorong Kismis, the rest of the sites are all freehold. As the rest of the developers continue to rush to top up their landbank, Roxy is poised to reap the advantages of catching the wave early. During the FY2017 earnings release, Roxy’s CEO revealed that it will be targeting to launch 6 sites in 2018. Depending on the response once they are launched, each project is a potential re-rating catalyst.

Strong Pre-sales Recorded

Because of the accounting treatment according to overseas residential projects, Roxy has attributable revenue of $459 million that will be progressively recognized from 1Q2018 onwards. Its annual report reveals that Roxy has achieved high sales rate for its projects in Australia and Malaysia. Assuming a 15% net profit margin, Roxy can book profits of S$69 million spread over 2018 and 2019.

Divestment Gain of 117 Clarence Street, Sydney 

[Update: On 4 May 2018, Roxy announced that it had entered into a non-binding sale and purchase agreement with an Australian entity for 117 Clarence Street in Sydney. The proposed selling price is AUD 153 million. Roxy purchased this office building in Dec 2015 for AUD 81 million (100% basis). It was last valued on its books for AUD 120 million. Therefore, assuming the divestment is completed, gross profit before taxes and professional fees would be approximately AUD 16.5 million for Roxy’s proportionate 50% share. This is very significant profits for Roxy to book in 2018 and even more positive for its operating cashflow. It goes to show that the Management have entered the office cycle at the right juncture as cap rates have compressed very quickly in less than 3 years.]

 

Investment Risks of Roxy Pacific

1. Singapore Residential Market

The single and biggest risk to Roxy right now would be a sudden downturn in the Singapore residential market. For instance, the government can step in with cooling measures that will catch the market off-guard. Therefore, it is critical that Roxy is able to launch their projects at the fastest possible time so as to ride the momentum.

Heartland Boy will be monitoring the take-up rate of its projects, as well as transaction volumes and price indexes of the Singapore market. Whenever possible, Heartland Boy will also visit their showflats and online chat forums to get a pulse on consumers’ sentiment.

Conclusion of Roxy Pacific

Real estate is a cyclical play and Heartland Boy is clearly trying to use Roxy as a proxy to ride the rising Singapore residential market. Therefore, he will get out as soon as the cycle is over or if Roxy is no longer seen as a good proxy. (if Roxy is unable to seek more sites in the futures given the stiff competition for land)

Heartland Boy has a personal target price of $0.71 on Roxy Pacific. Research reports by DBS Vickers and OCBC Securities indicated target prices of 69 and 66 cents respectively.

Vested at 55 cents since March 2018

This article was published on 9 March 2018.