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Broker's take: DBS upgrades Roxy-Pacific to 'hold' on strong property sales

DBS Group Research has upgraded Roxy-Pacific Holdings to "hold", saying the hospitality and property group has seen strong sales take-up despite recent cooling measures.

In a report on Friday, analysts Rachel Tan and Derek Tan lowered their target price for Roxy to S$0.39 from S$0.40, based on a 55 per cent discount to revalued net asset value.

Roxy shares last traded at S$0.405, below -1.5 standard deviation of its historical average. As such, DBS said it believes the potential headwinds from new property measures have been substantially priced in. However, it remains cautious on the stock and sector in light of an expected property market slowdown.

"Despite the strong sales take-up rates for its property launches thus far, with a pipeline of 600 units expected to be launched in FY19, we believe there could be limited positive catalysts given the softening buyer sentiment," the analysts wrote.

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"But Roxy has shown strong sales take-up from its property launches thus far, possibly due to its well-located projects on mostly freehold sites."

Three of Roxy's five new residential projects this year were launched before the new cooling measures were implemented, and achieved sales ranging from 77 per cent to 98 per cent. The two that were launched post-cooling measures fared worse, with Bukit 828 achieving 26 per cent sales as at the end of Q3 2018. However, Arena Residences fared better with 41 per cent of its units booked during the first weekend of launch, and having sold 56 per cent of units to date.

Roxy has a pipeline of six projects with a total of 600 units expected to be launched in FY19, with another three new projects expected to launch in the first half of 2019.

The property group is also building up its recurring income by acquiring investment properties. It recently divested 117 Clarence St for double its acquisition price and reinvested in three commercial buildings in Australia and New Zealand for S$117 million, which are expected to yield about 5 per cent in Australia and 6 per cent in New Zealand.

A potential catalyst for the stock would be property sales remaining strong despite recent cooling measures, DBS said. Key risks would be slower take-up rates; more government regulation to manage the local property market; foreign exchange fluctuations in the Australian dollar, New Zealand dollar and Japanese yen; settlement risks of its Australia projects and acquisitions of less desirable investment properties.