Posted by: donmihaihai | April 18, 2019

Random Oxley

After reading news of Oxley for years, I was quite surprise that the aggressive property developer is telling the world that it is trying to de-leverage. I did not dive deep into Oxley and Oxley will never get pass my smell test, ie flip through the number and going into the details only if needed. I know what to look for in a property developer or owner so I actually spent lot more time pulling out number to write this article than doing my smell test.

Of course Oxley is highly leverage. Highest among the handful developers that I has seen or smelled. But the thing is, Oxley current leverage is near the lowest for whole of its listed history. 4.23X, 4.06X and 4.44X for FY2017, FY2018 & 1H2019 compare to 5X to 10X for FY2011 to FY2016. Debt to equity say the same, below 3X from FY2016 to 1HFY2019 compare to 3 to 6X for FY2011 to FY2015.

Doesn’t make sense, trying to de-leverage at the time when debts level is near the lowest? I know interest rate is going up and there is more strict regulation, and the company is taking on more projects recently. But except for interest rate, Oxley has always operates under stricter regulation since listed and while Oxley indeed is taking on more project, its equity base also increased, it is far from its hey days where it was taking on $9 to $10 dollar of assets for every dollar of equity.

If we leave interest rate out for a while, then Oxley must has made some wrong moves recently. I can guess. For a company who turn around their projects fast, taking on assets that doesn’t turn will pull down their return, especially if these assets are not as income generating or sell fast. You can’t just fuel it with debts for equity investment and over dose on debts for hotel and office. The return profiles are different from property development.

What I did not say earlier is that Oxley changed the way its account for Hotel, own use office and investment property from cost to fair value in FY2016. Fine here, nothing strange on changing accounting policies, but it has a positive impact on any leverage ratio. Now, leverage ratio also become a function of capitalization rate or direct comparison as well.

With the help of a pen, Oxley can tell other, hey our B/S improved. I have problem with co. revalue their properties sitting under PPE. Revaluation upward can easily capture gain yearly as long as the co. is pushing for cap. Rate compression and aggressive in using direct comparison. But it hurt future P&L. check Oxley hotel segment P&L, it is the worse segment within Oxley.

Another funny part on these that doesn’t make sense unless you put everything together. Hotel is depreciate within the lease period, well close to 100 yrs and own use office which is free hold, depreciate within 60 yrs. Doesn’t make sense unless it is to create a positive P&L for segmental results.

After writing so much about leverage but the most important thing to look isn’t leverage or debt to asset or debt to equity ratio. Most debts doesn’t get repay. Most get roll-over. It is the ability the service the debt, ie interest that is the most important. 3 to 5 X interest coverage is just good enough but not strong, if the company has a very stable revenue stream. Like rental. Most REITs are around 3 to 5X. Now, if one add in something like property development, there will be not much safety if the development sales is slow.

Stronger listed property has an interest coverage of 5 to 10X, these are pretty safe companies. Oxley belong to the opposite where cover is 1 to 3X.

But there are tricks here. Which interest expenses to use and which earning to use. For a company like Oxley, taking interest expenses and earning appear in P&L is useless. The P&L interest expenses reflect the loan portion for hotel, investment properties and other investment not development properties where interest cost is included in the construction cost under POC. Earning is the combination of everything. Now doing a coverage ratio blindly mean nothing.

Hey there is another trick. Taking on property development with JV or associate actually promote risk taking and present only the good stuffs. Ie. Remove debts from B/S and interest expenses from P&L. Oxley one liner income from associate and JV say superb profitability from investment in JVs and Associates. How much debts are needed to fuel these returns? What Hong Kong Land is doing should be the standard for property developers. Their calculation of interest coverage includes JV and Associate.

Hong Kong Land financial also tell a world apart on how they run their businesses through their interests in BFC and ORQ with REITs and non REIT. With REIT is way more aggressive. Something doesn’t make sense again, why do investor invest in REITs, taking a 5%++ yield and thinking that a REIT is safer than a company? The hunt for yield never stop.

Hong Kong Land financials, especially on associates and JVs is a world apart from Oxley where information is just not there. Oxley present a liner on the same thing what doesn’t tell the story. Granted, accounting doesn’t say what to disclose to be exact. How Oxley disclose is telling me what it doesn’t want to disclose. Easy.

Take one of the JV Oxley Serangoon Pte Ltd in which SLB Development has an interest as associate (one accounted as JV and another as associate??). SLB number say assets – 841M, liabilities – 837M and net assets – 4M. Haha. Don’t need to be smart to know what these numbers stand for. Oxley share of net assets is only about 2M. Oxley has close to 6B of assets and 1.5B of equity. If this development is counted as subsidiary. It will blow it B/S and how many more developments can Oxley take on? Easy answer.

So why do Oxley want to de-leverage? Oxley will never achieve the same profitability if debt-to equity ratio goes down to 1 and will never differentiate itself financially. From what I can see through the numbers, there are a few investments that is not working out at the moment.

Is Oxley trying to change from a debts fuel developer who sell project super well to something else or just go back to the good old days and make sure that its sell all units fast.



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