Roxy Pacific Holdings safe from liquidity crisis, says analyst

Compelling value at current prices. At the current market cap of S$248m, Roxy Pacific Holdings is trading less than the independent valuation of its hotel asset alone (Grand Mercure Roxy Hotel "GMRH"), which is S$329m or S$590K per room - a fair valuation in the current hospitality market, in our view. Excluding GMRH, there is still an additional net equity of S$115m on its balance sheet. Moreover, we see little chance of a liquidity crisis, even in a bear scenario, as ~56% of its debt is secured on sold-out projects and the remaining on land sites.

Management buying shares. From end 2Q11 to date, we observe that ROXY management has cumulatively bought ~1.5m shares from the open market at an average price of S$0.46 per share. We believe this reflects management's belief that the share price currently reflects value. In addition, given ample cash on the balance sheet, we think management could further examine capital management options, such as a share buy-back program.

Expect three more launches in 4Q11. Despite recent macro uncertainties, we expect ROXY to launch three more projects in 4Q11. Everitt Building at 116 Changi Rd is expected to launch soon, with New Changi Hotel (80 Changi Rd) and Singapura Theatre (55 Changi Rd) to follow in Dec 11. All three projects are slated for strata-titled sales, and we expect launch performances to drive share price performance over 4Q11-1Q12. With the office sector facing inflection points ahead, we believe there were likely few, if any, concrete offers for Marina House (70 Shenton Way) which was put up for sale. As such, management is likely to go ahead with the project launch in 1Q12.

Likely cautious acquisition stance ahead. As of end-2Q11, ROXY had S$65m in available cash and fixed deposits, and management indicates additional debt headroom of S$150m. Despite ample ammunition currently, management would likely remain cautious in terms of acquisitions given heightened macro risks. Hence we expect acquisitions to stay bite-sized (<S$50m) with a preference for retail projects or mixed developments with sizable retail components.

Upgrade to BUY on compelling value. Given the macro uncertainties ahead, residential prices and sales volume would likely weaken in 2H11 but prices are unlikely to collapse significantly due to continued low interest rates and healthy liquidity. At the current ROXY share prices, we believe there is compelling value and a significant margin of safety. Upgrade to BUY with a fair value estimate of S$0.48 (30% discount to RNAV).