With an order book value of $3.3 billion, of which, about 52 percent or $1.7 billion were attributed to Singapore projects, homegrown Oxley Holdings (Oxley) has achieved greater heights growth via debt-induced growth.
While it might be an advantageous to acquire properties, and accumulate landbanks via borrowing, there is no guarantee that debtholders or banks would be willing to lend out or fund those acquisitions unless the collateral values of the assets being borrowed are of good quality, and asset values are intact especially during periods of liquidity crunches where capital is severely starved.
Source: SGX Stockfacts, Company Financials
On 11 February 2019, in Oxley’s press statement accompanying earnings release 1H19, management disclosed that on 28 January 2019, it entered into a letter of agreement to sell Blocks B and E of its Dublin Landings located in the Republic of Ireland for €175.5 million ($275 million) and the proceeds received will go towards replenishing its cash coffers, and reducing its gearing levels.
However, while management has not provided any indication of how much gearing level it plans to reduce, we noted that as of 1H19, the total debt-to-total equity (D/E) ratio rose by another level to 272.5 percent, up from the 238.1 percent as of FY18, and 230.1 percent in FY17.
Moreover, the Times Interest Earned (Interest Coverage) ratio has been steadily declining since FY17. As of 1H19, Oxley’s interest coverage ratio stood at around 1.35 times as shown on the chart above.
Performance Ratios Falling
|FY 2015||FY 2016||FY 2017||FY 2018||LTM ending|
|Return on Assets (ROA) (%)||2.8%||3.4%||4.2%||1.4%||1.1%|
|Return on Capital (ROC) (%)||3.5%||4.3%||5.4%||1.7%||1.4%|
|Return on Equity (ROE) (%)||21.2%||33.7%||22.2%||22%||16.8%|
|Net Income Margin (%)||11.2%||21%||16.2%||24%||22.2%|
Source: SGX Stockfacts, Company’s Financails
Based on data obtained from SGX StockFacts, and the Company, the major return measures such as Return on Assets (ROA), Return on Capital (ROC), and Return on Equity (ROE) are showing declining trends since FY17. Moreover, while net income margin (%) declined by about 100 basis points (bps) from 24 percent to 22.2 percent as of 1H19. It is important to note that the significance of taking on debt for expansion purposes, and overall business growth has not resulted in a similar or higher return margins.
Source: Company Financials
The Company’s total revenue for 1H19 as of 31 December 2018 fell 27 percent year-over-year (YoY) to $525.8 million from $716.7 million during the same period last year due to lower revenue contribution from a project in the UK.
Net profit during 1H19 fell by nearly half to $53.3 million from $116.8 million during the similar period last year, while finance costs rose 98 percent to $48.0 million from $24.7 million during the similar period last year.
Source: Company Financials
We noted from one of the highlights obtained from the latest 1H19 earnings release that while there is a slight improvement of the long-term secured debt outstanding which fell from $2 billion to around $1.9 billion. However, its short-term secured debt holdings ballooned nearly six fold from $142.4 million to $685 million.
Digging further, Oxley’s overall cash and cash equivalents last stood at $248.5 million, but its net cash from operating activities turned negative to $370.2 million from a positive $240.3 million during the same period. We noted in the cash flow statements that there was a large operating cash outflow of $386.9 million relating to the development projects during the 1H19.
We noted from the 1H19 earnings release that the Company disclosed that the International Financial Reporting Standards (IFRS) Interpretations Committee issued a tentative agenda decision for public comments where it presented its views that borrowing costs relating to development properties should not be capitalised but expensed when incurred. The Company’s accounting policy currently capitalises borrowing costs relating to its development properties under construction, which is the practice adopted by the property developers in Singapore.
We feel that if the Singapore Financial Reporting Standards (SFRS) were to change the capitalisation of interest expense of development properties to expensing method, this might result in the addition of higher interest rate burden to the Company’s overall financials, and thus might result in lower interest coverage ratios.
While the Company is trying to assess its implications, and the new accounting standard is still under review for eventual adoption, we think that it might be prudent for the Company to start considering adopting the new IFRS practice ahead of eventual implementation of the expensing policy in Singapore in order to reflect international practices, and to reflect more clearly about the impact of interest rate risks the Company might be facing.
We also think that investors will also be interested to know the implications, should the new expensing policies be implemented, and therefore assist in understanding the Company’s overall financial situation better.
A Recession Could Be Catastrophic
While the Company has been expanding its development pipeline aggressively both local and abroad, we think that the level of debt and the interest rate risks which Oxley Holdings is currently taking on have not been emphasised in greater details by management.
While it is good that the Company is still enjoying profits, albeit lower as of 1H19, the amount of debt especially the short-term secured debt which increased six-fold looks quite concerning considering that the global economic growth is showing peaking growth rates. The risks of a hard fall or recession could be catastrophic.