Is Oxley Holdings Ltd Overstretching Itself In The Pursuit Of Growth?

It is always fun to play with fire, but the fact remains – you might just burn yourself.

Oxley Holdings Ltd (SGX: 5UX) is a regional property developer and hospitality group which has projects running in Malaysia, Cambodia, China, the UK, and Singapore.

The company has been listed since 2010 and had recently announced that it has signed a memorandum of understanding with Shangri-La International Hotel Management Limited to open a Shangri La Hotel in Phnom Penh, Cambodia. The company has also been aggressively planning more projects in China, Malaysia, and Cambodia.

To fund all these, the company has been relying heavily on debt. As of 30 June 2014, Oxley Holdings’ net debt to equity ratio stands at 438% – that’s not a figure for the faint-hearted. This also begets the question: Has the company overstretched itself?

Property development is a capital intensive business. This is because as cash is collected after the developer sells its properties, most of the cash needs to be reinvested to purchase new land banks or to fund further development costs to ensure that the business is sustainable.

In fact, Oxley has yet to be able to generate positive operating cash flow in each of its financial years since the financial year ended 30 June 2010 (FY2010). Without operating cash flow, it had to resort to borrowing more and more to sustain its growth. So although the company’s total assets had increased from S$856 million in FY2011 to S$3.42 billion in FY2014, we see that its total borrowings had also grown from S$694 million to S$2.38 billion in the same period.

Recently, Oxley Holdings also announced that it had been able to raise the limit of its S$500 million multicurrency medium term note programme to S$1.0 billion. In essence, the company had just raised its borrowing limit.

Where is the risk coming from?

Frankly, I doubt Oxley Holdings will face any troubling issues in the future if it is able to continue selling its properties and refinance its borrowings. However, the company’s use of huge leverage has also reduced its margin for error.

If a project goes wrong, or property markets in its key geographical areas slow down, or the company runs into difficulty when refinancing its debts, there might be severe consequences. Investors who are interested in Oxley Holdings should be mindful of this fact.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.