Roxy Pacific - undervalued

Starting to up...

S&P initiated coverage of Roxy-Pacific. Report attached, fyi.

DBS Sec has a report on this stock today, with a buy call n target price of 44cts, a 30% discount to RNAV of 63cts. Note however, that a big portion of the increase in RNAV is due to a revaluation of the hotel (about 28.5cts above the hotel\'s book value per share). As such, it\'s a bit hard to compare Roxy with other pure smallish developers, as hotel stocks tend to trade at big discount to RNAV. For eg, St Land\'s RNAV is probably above $1, so the stock easily trades at 50-60% disount to RNAV at the moment. St Land is also exposed to residential and office properties, albeit in Australia. In addition, other smallish developers like Heeton, Sing Holdings, Hiap Hoe and Soilbuild probably look more attractive at this juncture. However, I do like Roxy\'s management\'s track record in acquiring and selling its properties so far and will consider buying back what I sold today, at lower levels.

DBS Vickers\' report is attached, fyi.

sumer, the 63-cent RNAV is not boosted substantially by the revaluation of the hotel by DBS Vickers. DBS\' valuation is only a little higher than that by a valuer which was captured in the 2009 results, giving a RNAV of about 50-odd cents. The extra 10- cents came \"after taking into consideration proceeds from the nine existing projects which have been fully sold, development from the six new sites and contribution from the hotel and investment properties.\" It sounds like the $280-m presale revenue yet to be booked, plus that from the 6 new sites, etc

Hi Harlequin, In the DBS report, RNAV was arrived at in Table 2, which shows that the RNAV of 63cts comes from (1) Revaluation of Roxy Square shops and Kovan Centre ($1.2m), (2) Surplus coming from DBS’ valuation of Mecure Hotel over its book value ($181m), (3) NPV of profits from development of all properties (fully sold + unlaunched ones) ($83.6m), and (4) Present Book Shareholders’ equity ($133.4m. Note this includes the book value of Mecure Hotel). These add up to $399.2m, and when divided by the total number of shares of 636.6m, it arrives at a RNAV per share of 63cts. The book value of Mecure Hotel in Roxy’s book is $64.5m. Roxy metnioned that it had done a valuation of its hotel recently ($232.4m) but it uses book value for accounting purposes. DBS Securities revalued Mecure at $245.5m, resulting in a $181m revaluation surplus over book value, which is 28.4cts per share ($181m divided by 636.6m shares). In fact, the hotel’s new valuation of $245.5m means that the value of the hotel alone makes up 61.5% of total RNAV ($399.2m), or 38.7cts out of the 63cts, per share. The NPV of the profits from all its development projects, according to that report, is $83.6m. Pre-sale revenue (the $280m you mentioned) is irrelevant in the calculation of NPV of future profits. The reason why the NPV of Roxy’s future earnings is not that big is because its projects are mainly small in scale. Prior to DBS Securities’ report, I have done my own analysis of Roxy’s profits from its sold and unsold projects, as well as the valuations of its hotel and other assets, and I have basically arrived at about the same figures as DBS. My figure for RNAV comes up to 67cts, the higher figure coming mainly from my assumption that Kovan Centre would be redeveloped into a new residential/commercial building, which DBS Securities did not assume. My assumptions for some of the selling prices of Roxy’s projects were also probably slightly lower, as I prefer to err on the side of being conservative. Sometimes, different analysts’ assumptions of different selling prices and costs affect the different future earnings and hence the RNAV of a property company, but these can be traced and checked against what you personally think are reasonable assumptions. I have also seen S&P’s report on Roxy. It had arrived at Roxy’s RNAV in a different way (arriving at the Enterprise value), a method which I am not familiar with. For eg, I am not sure what they mean when they put in a valuation figure of $119.13m for the Spottisewoode site. In my own calculation, this site has a potential gross earnings of $46.18m, arrived at from taking the expected selling price (I assumed $1,700psf) minus the cost ($1,320psf, made up mainly of land cost of $870psf and construction and other cost of $450psf) and then multiplying the difference by the NSA (net saleable area) of 117,246 sq ft (arrived at by multiplying land size with plot ratio, and assuming 100% efficiency in construction). Hence, based on my assumptions, Gross Profit for this site = (1,700 – 1,320) X 117,246 = $44.55m This is nowhere near the $119.13m that appeared in S&P’s report. I just have no idea what their figure means, but if it’s the gross profit for that project, then, working backwards, one would arrive at a selling price of above $2,200 psf, too ambitious in my opinion. In short, I would prefer to use DBS\' straight forward way of calculating RNAV (which is my method as well). Regardless, if one believes in the rosy tourism story and a strong property market going forward, this counter may still look attractive, although one should then compare not just with pure property plays but those with a hotel component in them and make a decision based on the knowledge gained from dissecting analysts’ reports.