We may potentially see two superstock candidates this week. I have some concerns on the fundamentals of  the other company I am interested i...

Weekly Superstock Scan 13 Feb 2017 - 17 Feb 2017: Oxley Holdings Limited (Singapore)

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We may potentially see two superstock candidates this week. I have some concerns on the fundamentals of  the other company I am interested in. In the interest of time, I shall blog on the company that I am more confident in this week first.

The first potential superstock is a Singapore property developer specialising in residential cum commercial developments - Oxley Holdings Limited (SGX: 5UX).





At the point of time where the Singapore economy does not look too promising, the property and construction sector appears to be the only bright spot left. On the back of improving fundamentals, the Singapore developers are up 12.3% year to date, outperforming the Straits Times Index by 6.2%. This is reflected in my Singapore investment portfolio as well, which consists mainly reits and property counters.

Technical



Oxley has been trading at a range of $0.36 - $0.48 most of the time since the second half of 2015. During the entire period, the 30wMA has been flat. The stock is in the basing area of its market cycle in Stan Weinstein's stage analysis.

Last week, price broke strongly above $0.5 to close at $0.555. Compared to the opening price of $0.48, the stock moved up by 15.6% in one week. The volume of shares traded this week is approximately 7 times its average trading volume. 

The meat of the move occurred on the 8th February when Oxley Holdings announced that it has entered into a non-binding term sheet to grant a convertible loan facility of up to S$50m to International Healthway Corporation. I will elaborate more on my thoughts of this deal in the next section.


Fundamental



As at the most recent quarter, Oxley did not register consecutive quarters of year on year EPS growth. I am not too concern about it since the overall trend is still upwards, and one bad quarter is not a cause for alarm since property developer stocks tend to fluctuate quite a bit.

Geographical Expansion through Asset Light Approach

Oxley Holdings started off as a property developer focused on the Singapore market. Since then, Oxley has expanded into many countries in Asia, Australia and Europe. Currently Oxley has about $2.60 billion of unbilled contracts, with only around 20% of it is for projects based in Singapore.




This helps Oxley to continue its growth at a time where the Singapore economy is in a challenging environment.

In view of the rising interest rate environment, Oxley is looking at asset-light approaches for further expansion in overseas markets. Through setting up joint ventures and partnerships, Oxley has expanded into Malaysia, Indonesia and Myanmar. Just at the start of this month, Oxley has formed a new joint venture company, Oxley Planeyvision Propertties Ltd in Cyprus. This new joint venture will look at undertaking large scale property projects in Cyprus.

Improving Cashflow

One of my concerns with investing in property developers is that it can be difficult to evaluate their fundamentals. Their revenue and income tend to fluctuate a lot due to long project cycles. 

Therefore, it is a positive sign that Oxley is building up its recurring income though its investment and hospitality portfolio. Their hospitality portfolio is actually promising with big names like Shangri-la and So Sofitel in the portfolio.

On a shorter-term, Oxley has already seen operating cash flow turn positive in FY16 after registering negative operating cash flow from FY11-15.

IHC Deal

Some investors may think that Oxley have gotten a good deal with the loan to IHC. Under the agreement, Oxley will be entitled to convert the loan into ordinary shares of IHC at $0.06102 per share, a 10% discount to the volume weighted average price. The management sees synergy between the two companies as Oxley looks to venture into the fast growing medical property business.

Matrices
- Very large float of 377 million shares, more than 500 times its daily traded volume
+ Low P/E ratio of 6.2 base on trailing 12 months EPS
- Relatively low gross margin of 30% for property developer 


Risk Factors/ Things I do not like

  • Regulatory and policy risks faced by overseas projects in less developed markets - There may be changes in regulations involving taxes on property sales or cooling measures which may affect the sales of the units.
  • Exchange rate risk - While it is good for Oxley to diversify its risk by expanding overseas, it subjects Oxley to exchange rate risk. In particular, it has projects in London which may be impacted by Brexit.
  • Validity of the catalyst - I agree that the IHC deal looks to benefit Oxley. Putting things into perspective, Oxley is worth approximately S$1.4 billion (before the surge in price). A S$50 loan sending Oxley's stock up more than 15% just sounds too good to be true.



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