• Oxley continues to thrive with 69% sales for Singapore inventory (target of 100% by end-20). Invariably, the Coronavirus outbreak has impacted its Gaobeidian sales and hospitality portfolio. The group continues to stay nimble, with its deleveraging on track and net gearing declining to 1.94x (-31ppt q-o-q).
• The negative global outlook has also pressured interest rates downwards, lowering the group’s borrowing costs.
• Maintain BUY with a lower target price of SGD0.49 pegged at a 30% discount to our RNAV.

2qfy20 Results

Results below expectations.

• Oxley Holdings (SGX:5UX) reported a 2QFY20 PATMI of S$3.6m (-90% y-o-y), bringing 1HFY20 PATMI to S$15.7m (-54% y-o-y). 1HFY20 revenue grew 13% y-o-y to S$594m, due to the increase in revenue from development projects in Singapore and Dublin, 3-month contribution from the Australia subsidiary, partially offset by lower contribution from the UK project.
• Still, 1HFY20 gross profit declined (-6% y-o-y) due to lower gross margins (- 3ppt y-o-y), dragged by lower-margin residential projects in Dublin, the new subsidiary in Australia and certain Singapore development projects.
• 1HFY20 share of results for associates and JVs was a S$12.3m gain (vs S$3.9m loss same period last year), mainly attributable to an associate in the UK. Finance costs crept up (+14% y-o-y), primarily due to the increase in borrowings to finance the group’s development and investment projects and advances to JVs, partially offset by the absence of interest cost incurred on the bank borrowings for an investment property deconsolidated in 4QFY19.. We expect better recognition in 2HFY20.

Stock Impact

Singapore residential sales to reach at least 85-90% (targeting 100%) by end-20.

• To date, Oxley has sold over 2,723 units (c.69%) of its 3,923 units of Singapore inventory (inclusive of commercial units). Four of the projects (incl. The Verandah Residences, Sixteen35 Residences, Sea Pavilion Residences and The Addition) are almost completely sold.
• We believe that management’s sales guidance is quite achievable (given their pace of selling at 2.5% p.m of their inventory on average, in 2019).

First-mover advantage, amid a challenged Singapore residential outlook.

• Management noted that the Singapore market may be weighed down by oncoming supply and build-up of unsold inventory. The impact from the coronavirus is also unclear, but real estate in countries with good medical facilities may attract buyers seeking to protect the health of themselves (and their families).
• Despite the cautiousness, management remains confident that their pricing (in terms of overall quantum/and psf) remains attractive, as compared to later movers in the cycle (ie who have locked in land and material costs higher). Management believes the later launches (which will be priced higher), will trigger a return of buying interest to their projects (eg Riverfront Residences, and Affinity @ Serangoon).

Lower borrowing costs expected.

• Lower borrowing costs expected; along with a decline in net gearing to 1.94x (vs 4QFY19 restated gearing: 2.20x), which was mainly due to lower net debt of S$2.8b (vs S$3.1b in 4QFY19). If not for the adoption of the new accounting standards to expense borrowing costs incurred for development projects (over the period of development to income statement), gearing ratio would be below 1.80x (vs 4QFY19 gearing: 2.06x).
• Gearing concerns also remain in check, with high cash flow visibility of S$3.3b unbilled sales (vs S$2.8b net debt). Management also expects the negative global outlook (due to demand shock from novel coronavirus) to put downward pressure on interest rates, and lower the group’s cost of borrowings.

UK projects update.

• On UK projects, management noted that the Brexit resolution bodes well for its London projects, such as Deanston Wharf (which is slated to launch within the next 3 years). The heightened confidence in the UK market should spill over to Connolly Station in Ireland, which Oxley was in process of getting planning permission to build a mixed-used development.

Coronavirus outlook: Hospitality and China portfolio to bear the brunt.

• Management alluded that sales for its Gaobeidian project has temporarily dampened (Phase1 sales:180/654 units), while its Singapore hotel assets is also bearing the brunt. The impact on its Singapore development projects is more manageable, as costs have been locked-in. For any slight delays, contractors can still catch-up with the progress at a later stage.

Earnings Revision/ Valuation

• We cut our 2020-22F net profit estimates by 2%, on occupancy losses and ADR cuts across its hospitality portfolio.
• Maintain BUY with lower target price, pegged at 30% discount to our RNAV of S$0.70.

Share Price Catalysts

• Positive newsflow on take-ups and/or handovers for Singapore and overseas projects.

Source: UOB Kay Hian Research - 11 Feb 2020