What's happening?
We met Oxley Holdings today in a meeting for fixed income investors, where the company was represented by Executive Chairman and CEO Ching Chiat Kwong, Deputy CEO Eric Low, and Financial Controller Ooi Chee Eng. Although the meeting was designated as part of a "non-deal" roadshow, it would be logical to expect that Oxley Holdings will be tapping the bond market in the near future – the company recently announced a new fixed income mandate on 6 April 2017 alongside the establishment of a USD1b MTN programme. In this quick update, we offer some key takeaways for investors.
Not frugal, but adopting a prudent approach
Management described Oxley's approach as "not frugal, but prudent", as part of an explanation for the company's sizable debt load. This alludes to the company's sizable amount of borrowings which were undertaken to fund numerous opportunities, although Deputy CEO Eric Low pointed to certain mitigating factors, including the company's maintenance of a sizable cash and equivalents balance (approximately S$462m as of end-Dec 16) as a buffer, as well as the company's decision to keep a sizable amount of assets unencumbered (including the company's stakes in Galliard Group and Pindan Group) which could be tapped upon for additional borrowing ability should the need arise. Executive Chairman and CEO Ching Chiat Kwong also pointed to Oxley's focus on higher-margin development projects, which entails a need for price discipline in terms of land acquisitions – he suggested that current land prices for residential developments in Singapore were still too high for Oxley to generate a sufficiently high profit margin, hence the firm's need to move into opportunities abroad.
Sizable amount of revenue expected to be generated from existing developments
Management suggested that even without the acquisition of further landbank, the company's existing developments would still be expected to generate a sizable amount of revenue (management alluded to a development value in excess of S$6b). Management also indicated that selected properties would add to recurring income, identifying the existing Space@Tampines property, as well as the upcoming Novotel Singapore on Stevens and Ibis Singapore on Stevens which would be expected to contribute to further income stability. Management also talked about Oxley's preference for working with local landowners to form JVs, where Oxley brings the development expertise and space planning capabilities, which reduces Oxley's incentive to overpay for landbank, while sharing profits (and risks) with landowners.
Excitement about the company's China development project
Executive Chairman and CEO Ching Chiat Kwong spoke with much excitement on the company's Sino-Singapore Health City joint-venture development in Gaobeidian, Hebei province, which has benefited from China's recent decision to locate its latest Special Economic Zone (SEZ) in Hebei. The announcement has resulted in a significant jump in property prices in Hebei, and management indicated that a sales launch scheduled for the end of the month has been postponed, given the need to reassess pricing (with a view to pricing the launch at a much higher price!). Management indicated that based on simplistic back-of-the-envelope calculations, the firm's 27.5% stake in the development (other JV partners are KSH Holdings, Lian Beng Group and Heeton Holdings) has the potential to deliver a profit in excess of S$600m.
Bond market still Oxley's preferred financing avenue
Oxley's senior management revealed that despite the higher cost of funding, the bond market would still remain Oxley's preferred financing avenue – the key reasoning for this is that Oxley's development projects require 4-5 years before revenue is eventually recognised upon project completion, a timeline which is more aligned with bondholder expectations. Management also indicated that bank financing terms may be more volatile, especially in times of a credit crunch, hence the preference for more stable financing from the bond market.
A potential USD bond issue?
While Oxley Holdings has been a repeat issuer of SGD-denominated bonds in the past (issuing both retail and wholesale SGD bonds), we understand that Oxley Holdings also met with investors in Hong Kong, which suggests that the company may be looking towards a USD-denominated bond issue next. Taking reference from Oxley's most liquid SGD bond (OHLSP 5.000% 05Nov2019 Corp (SGD) - Retail) which is currently quoted at around 350bps over swaps, we estimate that a potential 5Y USD-denominated bond issue could be priced in excess of 5.5% (assuming a marginally wider spread of around 365bps); at such levels, this would make the bonds an attractive proposition for investors looking for higher-yielding USD-denominated debt, in light of the company's strong earnings visibility and our expectation that the firm's leverage will continue to decline (see Oxley Holdings Ltd: Reiterating Our Top SGD Retail Bond Pick [20 Jan 17] and Oxley Holdings Ltd: High Yield Retail Bond Opportunity? [23 Sep 16]). Of course, supply and demand factors may be very different in the USD-denominated Asian debt market (versus considerations for the SGD bond market), so we'll be eagerly watching to see how investors in the broader Asian hard currency debt market view Oxley Holdings' credit standing versus other real estate peers.
