The writer is a shareholder of Roxy-Pacific Holdings and a full-time investor..
I recently bought into Roxy-Pacific Holdings as I considered it deeply undervalued, and had the following merits:
* Substantial discount to RNAV (the freehold hotel value is carried at cost). Its share price was recently at 31.5 cents while its RNAV is 48.83 cents a share.
* Astute management (cheap acquisitions in the areas, all below S$ 500 psf ppr).
* Long experience in the district 15.
* Blockbuster year for 2010/2011 as S$231 m worth of revenue unrecognized and with approx 20% net margins this equates to S$46 m worth of value.
* Trading at steepest RNAV discount to peers - Sim Lian, Heeton, Sing Hldgs and Soilbuild.
* Firm enjoys a 6-year long history of high growth, ROE 20% and net margins over 20%. Q12010 net margin dropped to 14.8% mainly due to higher % contribution from property development segment which has lower profit margin as compared to hotel & property investment segment.
Roxy-Pacific’s 1Q results came in much better than I expected as the company recognized more revenue from completed projects.
* Revenue was up 60% while profit rose to 42%
* $121.7m of $149.6m, or over 81%, in 'properties for sale under development' were sold.
The increase from $131.5m in Dec 09 was due to purchase of site at Lorong 102 Changi.
* Short term debt of $160.42m and long term debt of $96.06m. Total $256.48m
$72.6m of short-term debt will be repaid by March 2011 upon TOP and collection.
And if you worried why net debt to equity was high...bulk of cash is locked up in project accounts.
Assuming firm earns $30m in 2010 (likely to be much higher), they would need approx over 2.7 years to pay back the debt - which is perfectly reasonable and in fact on the low side for developers.
Total debt is ($256.48 - $72.6m - $101.471) = $82.409 / $30m of estimated profit = 2.7 years (Short-term debt of $72.6m is cancelled upon collection of payments but cash is not yet recorded but I am certain that payments will clear the debt)
* Firm remains adopting FRS 16: Hotel is still at cost less depreciation/ impairment.
* Property devt is 82% of total revenue.
"The Ambra" TOP was in March 2010. Revenue recognized from 9 projects, Azzuro, Verte, Adara, Ambriosa Ambra, Florentine, Nova 48, Nova 88 and Lucent.
* Hotel and property investment is 18% of total revenue: Hotel Average Occupany Rate improved from to 82.4% to 93.5% yoy (13% rise)
Hotel Average Room Rate declined from $167.2 to $151.8 yoy (a 9% decline year-in-year). Revenue per available room was up from $137.8 to $141.9 (a 3% rise year-on-year)
* Gross margins wise, property devt made up 55%, rest from hotel and investments
Hotel margins flat while property devt declined due to recognition of lower margin projects
* Intention to launch 4 out of 7 current plots of development sites in 2010: Pre-sale revenue of $231m from the existing 8 fully-sold development projects will be recognized from rest of 2010 to 2011.
* Firm's intrinsic value remains intact
NAV rose in 1Q10 due to quarterly profit and revaluation surplus was higher due to lower hotel net book value after 1Q10 depreciation.
* Still a deeply undervalued counter with favourable risk-reward ratio
RISKS
* Downside is very low
Assuming 0.5-0.6x NTA (book value + hotel RNAV), downside is 7-22.5% Upside taking into hotel only is already 55%. Management is very transparent and communicates their thoughts through the quarterly reports. Recently gave a dividend of S$0.01.
* I suppose the fear lies in inability of firm to replenish landbank and control margins.
Dont forget...
... you are buying it at less than the hotel value alone (gives only 45% of gross profits).
... Singapore residential real estate remains robust, in fact improved over last quarter.
... Significant improvements in hotel segments and embedded value in Kovan Centre.
I will look to buy more Roxy-Pacific shares in the coming weeks.
