• ROXY-PACIFIC HOLDINGS LIMITED (SGX:E8Z)'s 1Q19 results impacted by absence of fair value gains but supported by settlement of Australia project.
• 1Q19 PBT (ex-fair value gains) rose 204% y-o-y.
• New commercial projects:
  1. industrial development in NSW and
  2. hotel in Melbourne CBD.
• Maintain HOLD, Target Price of S$0.39.

Maintain HOLD; Target Price of S$0.39

• We maintain our HOLD rating on ROXY-PACIFIC HOLDINGS LIMITED (SGX:E8Z) and Target Price of S$0.39, based on a 55% discount to RNAV.
• It is currently trading at below -1.5SD of its historical average. As such, we believe the potential headwinds from new property measures have been substantially priced in.

Where We Differ

• Negative sentiment continues to weigh on property sales. Despite the strong sales take-up rates for its property launches thus far, with a pipeline of 600 units expected to be launched in FY19, we believe there could be limited positive catalysts given the softening buyer sentiment. But Roxy-Pacific has shown strong sales take-up from its property launches thus far, possibly due to its well-located projects on mostly freehold sites.

Potential Catalysts

• Property sales to remain strong despite recent cooling measures; building up of recurring income.

1Q19 Results Supported by Settlement of Australia Project, the Hensley

• Roxy-Pacific's 1Q19 net profit fell 31% y-o-y to S$5m, mainly due to the absence of fair value gains recognised in 1Q18. Excluding these fair value gains, 1Q19 PBT would have increased 204% y-o-y to S$7.3m, supported by recognition of the settlement of The Hensley project in Australia.
• Key highlights:
  1. unrecognised sales stood at S$590m mainly from Australia and Singapore,
  2. decent take-up rates given soft market sentiment,
  3. divestment proceeds reinvested in new investment/hospitality properties.

Key Risks to Our View

• Slower take-up rates,
• Government regulates more to manage the Singapore property market,
• AUD/NZD/JPY forex fluctuations,
• settlement risks of Australia projects, and
• acquisitions of less-desirable investment properties.

What's New - Driving Growth From Down Under

Roxy-Pacific's 1Q19 net profit fell 31% y-o-y mainly due to the absence of fair value gains of asset divested in FY18; adjusted EBITDA rose 9% y-o-y despite absence of gains.

• Roxy-Pacific’s 1Q19 net profit fell 31% y-o-y to S$5m, 14% of our FY19F estimates, mainly due to the absence of fair value gains recognised from 117 Clarence Street, with the SPA agreement to sell the office building signed on 25 June 2018. Excluding the fair value gains, 1Q19 PBT would have increased 204% y-o-y to S$7.3m.
• Roxy-Pacific's 1Q19 revenue almost doubled y-o-y to S$89m, largely from development properties (+133% y-o-y) following the settlement of The Hensley project in Australia.
• Roxy-Pacific's 1Q19 adjusted EBITDA grew 9% y-o-y to S$15m despite the absence of fair value gains from 117 Clarence Street, mainly supported by recognition of the settlement of The Hensley project in Australia.
• Roxy-Pacific's 1Q19 gross profit margin contracted to 24% from 32% in 1Q18, due to
  1. lower margins of 19% on its development properties (vs 21% in 1Q18), and
  2. change in portfolio mix which is now skewed towards development properties following the lumpy recognition of development projects, which have lower gross profit margins.
• However, we note that margins from hotel and investment properties fell marginally by 2ppts and 6 ppts respectively, possibly due to refurbished/new hotels opened in FY18 and lower profit margin from NZI Centre.

Unrecognised sales stood at S$590m as at 1Q19.

• As at 1Q19, unrecognised sales stood at S$590m (from S$631m as at FY18), to be recognised from 2Q19 to FY23. The unrecognised sales comprise largely those from its Australia properties (47%) which are expected to be completed in 2020/2021, and Singapore properties (44%).

Take-up rates of three property projects launched in 1Q19 impacted by soft market sentiment.

• Roxy-Pacific launched three properties in 1Q19 out of its target of six property launches in FY19. All three properties’ take-up rates range from 5-19%. Given the soft market sentiment led by the government imposing tighter property measures, the sales rate has been decent, and we believe the company should continuously move sales through creative strategies.
• Roxy-Pacific has three remaining projects, Dunearn 386, VIEW at Kismis and NEU at Novena expected to be launched in 2H19.

First foray into Australian hospitality sector with the redevelopment of Melbourne House expected to complete in FY22.

• Roxy-Pacific has received the approval from Melbourne City Council to redevelop Melbourne House, a freehold commercial and retail building located in Melbourne’s CBD, into a 319-room hotel. It has signed a management deal with Park Hotel Group and expects to open Park Hotel Melbourne in FY22. This marks its first entry into the Australian hospitality sector.

Noku Maldives officially opened in Aug18; Phuket to open in FY20.

• Noku Maldives, officially opened in August 2018, has been well received. Its flagship Grand Mercure Singapore Roxy hotel and Japan hotels continue to contribute healthy recurring income. The opening of its hotel in Phuket has been delayed to FY20 from FY19 previously.

Divestment proceeds reinvested; acquired its first industrial property in Australia.

• Following the divestments of two office assets in Australia, Roxy-Pacific has redeployed its proceeds with the completion of acquisitions of 33 Argyle Street, NSW in January 2019 and 312 St Kilda, Melbourne in January 2018. In addition, Roxy-Pacific acquired its first Australian industrial property, a 50% stake in 36 Mavis St, Revesby, NSW. Management plans to build industrial and storage units for sale.

Maintain HOLD; Target Price of S$0.39

• We maintain our HOLD rating on Roxy and Target Price of S$0.39, based on a 55% discount to RNAV.
• Roxy-Pacific is currently trading at an attractive valuation of 1.0x FY19F P/NAV, below -1.5SD of its historical average traded during the last property cycle (FY13-FY17). As such, we believe the potential headwinds from new property measures have been substantially priced in.
• Despite the attractive valuations, we remain cautious and see limited catalysts for Roxy-Pacific and sector given expectations of a slow property market.

Source: DBS Research - 9 May 2019