Excerpts from analyst's report

NRA Capital analyst: Liu Jinshu

59GoulburnStInvestment property since July 2014: Roxy-Pacific owns 100% of this 28-storey commercial building on 59, Goulburn St in Sydney. Photo: www.commercialrealestate.com.auEstablishes Second Core in Sydney

 Investments in Sydney as a secondary growth driver. During the last two months of 2015, property and hospitality group Roxy-Pacific Holdings Limited (Roxy) more than doubled its investments in Sydney with A$151.05m of acquisitions.

Our review shows that Sydney has the potential to provide further long term upside due to tight supply/demand dynamics.

Roxy’s ventures into the Sydney market, if successful, will support the creation of a second core property development/investment market to raise its growth capacity in the long-term. 

Consolidating overseas experience from recent years. Over the last decade, Roxy has benefited from the growth of the Singapore market. To maintain such high growth, Roxy will have to either take on larger and riskier projects in Singapore or expand overseas. During the last two years, Roxy started by investing in joint ventures with partners. Lately, the establishment of an office and property portfolio in Sydney shows that Roxy is consolidating its previous experience to accumulate deeper local know how and, at the same time, explore the creation of a second core in the property business.

Sydney offers long term upside amidst risks. The Australian market has been attractive to investors for its stable regulatory regime vis-à-vis emerging markets in Southeast Asia. Within Australia, Sydney has a young and growing population, supported by a high proportion of migration. Hence, long-term demand for property in Sydney is positive.

Lately, the local Regulation Authority has implemented lending curbs in response to high household borrowings and deteriorating affordability. Home prices have since likely fallen in November and December. However, vacancy and foreseeable supply remains low, suggesting that downside risk is limited, as homebuyers will have little choice, but to either offer higher prices or pay higher rent.

Portfolio of choice, prime sites. We also hold the view that Roxy’s portfolio of properties in Sydney is relatively resilient. The supply of office properties is tight and not subject to housing price risk. As for the three residential projects, two are located within the inner city area, right on the fringe of the CBD.

Liu Jinshu"In all, we expect Roxy to make net profit of about A$36.77m from the three development projects, translating to incremental earnings of 3.06 Singapore cents per share. Adding this value back to the company’s adjusted net asset value per share of S$0.769, we derived a revised NAV of S$0.8000. Applying a discount of 30%, we value Roxy at S$0.560 per share, translating to an upside of 14.2%." -- Liu Jinshu (photo)

As such, these sites should be popular with buyers looking to stay near the CBD.

The site at Potts Point is in a locality that is being revitalized and the neighbourhood has attracted both domestic and foreign property companies.

Valuation pegged at 0.7x RNAV or S$0.560. While the investments in Sydney will generate long-term value, we also caution that Roxy’s near term performance may be subdued due to the gap between existing local and upcoming overseas projects. In this report, we focus on the projects in Sydney. As no forecasts have been formulated, no rating is assigned.

Full report here.

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