Roxy-Pacific: Decent discount to RNAV even after 25% discount

In Property on 11/03/2011 at 9:20 am

But company is leveraged over its eyeballs — 128%. I’ll give it a miss but OCBC’s analysis is worth a read in giving one the facts on which it bases its call.

OCBC Investment Research, March 9

ROXY-PACIFIC Holdings is a specialty property and hospitality group in Singapore. It primarily develops domestic residential projects, and also owns two investment properties and a hotel, Grand Mercure Roxy Hotel (GMRH). In FY10, 77 per cent of revenues and 59 per cent of earnings were derived from the property development segment. The investment properties segment and GMRH constituted 1.5 per cent and 20.5 per cent of revenues respectively. We expect future earnings in FY11 and FY12 to be underpinned by recognition of revenue at 12 projects that are mostly sold out.

We believe Roxy enjoys a strong reputation for quality small to mid-sized projects in the East; and in recent years, it has expanded successfully to other regions and larger projects, ie, Spottiswoode 18 at Tanjong Pagar. Management has indicated a soft target of $300 million in acquisitions this year and would also look closely at commercial and retail deals. The current balance sheet shows a high net gearing of 128 per cent. If we revalue GMRH to $188 million (currently held at $71 million book value), net gearing falls to 61 per cent..

We have valued Roxy at $0.55 per share – a 25 per cent discount to its RNAV sum-of-the-parts value of $0.73.We have valued GMRH both on discounted cash flow and net operating income-cap rate bases, and derived a fair value of $188 million. At Roxy’s current market cap of $283 million, if we account for our conservative valuation of GMRH and include the net present value of already sold-out projects, we find the market is pricing in an expected value destruction of $144 million ahead.

We think this is unrealistic given Roxy’s limited investment asset exposure, the four landbank sites that will launch in FY11-12, and management’s plan to deploy $300 million in capital in FY11. We estimate the market price of Roxy roughly translates into an expectation of a 30-40 per cent likelihood of a catastrophic 30 per cent plunge across property prices. Given current datapoints in the property market, we think this is unrealistic.

We think the four landbank projects (expected to launch in FY11-12) will add at least $20 million to RNAV. In our opinion, results at these launches will cause the market to re-calibrate its share price upwards. Also, given the recent share price performance, we think the market is overly pessimistic on acquisitions performance.

Thoughtful risk-weighted acquisitions in FY11 will also be catalysts for further share-price upside. Finally, with the fundamental value held in GMRH and already sold-out projects, the downside is likely capped for patient investors who take on prudent exposure. Initiate with a ‘buy’ and a fair value of $0.55 (at a 25 per cent discount to RNAV of $0.73).


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