- We initiate coverage on Eco World Development Group Bhd (Eco World) with a BUY rating and a fair value of RM5.82/share – a 10% discount to our estimated pre-acquisition NAV of RM6.46/share. Post-acquisition and the equity fund-raising exercise, our ex-all fair value is RM2.39/share, based on a similar 10% discount to our fully diluted NAV of RM2.65/share.

- Eco World is undergoing a massive corporate exercise involving:-

(i) acquisition of 100% equity interest in Eco Macalister Development S/B, Eco World Project Management S/B and 8 development rights from Eco World S/B for a net consideration of RM1.8bil; and (ii) fund-raising exercise comprising a 1-into-2 share split, issuance of new shares to the landowners, a 1-for-2 rights issue, 4-for-5 free warrants, and a 20% private placement.

- The key positives for Eco World are:- (i) A strong management team transplanted from SP Setia. Former SP Setia personalities were the key driving force of SP Setia’s success. Eco World is spearheaded by Datuk Chang Kim Wah, the former executive director of SP Setia. More importantly, the emergence of SP Setia’s founder, Tan Sri Liew Kee Sin, who has recently joined as a non-independent non-executive director, is a strong affirmation.

(ii) Aggressive land-banking and strong execution capabilities should provide a strong foundation for robust earnings trajectory and NAV growth.

(iii) Post-acquisition, Eco World’s GDV would rise significantly by >3x to RM43.5bil, on the back of rapid land bank expansion to 4,433 acres, which are located within key markets, i.e. Klang Valley, Johor and Penang.

- However, the two challenges in the near term are:-

(i) Share price has risen substantially (by >4x since September 2013). Earnings base valuations appear somewhat stretched at a fully-diluted FY15F PE of 49x, post-exercise. Earnings delivery is still at the early stages. It would take some time for the group’s earnings to expand to justify its currently stretched valuation.

(ii) Concerns of a potential share overhang. The market needs to negotiate through the massive fund raising exercise and immediate dilution risk from the proposed new share issue. Further out, there is also a 20% private placement. Its paid-up capital is expected to rise by 11.4x to 2,890mil.

- For a start, Eco World is targeting new sales target of RM2bil and RM3bil respectively for FY14F and FY15F, backed by nine new launches over the next two years.

- We expect land acquisitions to be the primary valuations driver. Given a recapitalised balance sheet (post the corporate exercises), Eco World must demonstrate its ability to grow land acquisitions to drive NAV growth, considering its huge share capital expansion.

Source: AmeSecurities