• Eco World’s 1HFY17 core net profits of RM55.0m came below ours and consensus estimates making up 31% and 39% respectively of full year estimates. We however, expect earnings to catch up in 2H.

• Central region or Klang Valley continued to be the mainstay for the group making up 77.9% out of total sales of RM1.71bn from its Malaysia projects.

• We downgrade to HOLD from BUY as we deem most of the positives already priced in. Share price has risen by 27% YTD, outperforming the KLCI’s 9% gain.

Flattish earnings year-on-year

Eco World’s 1H17 earnings came in rather flat, easing by 0.5% yoy despite 17.1% growth in revenue. This is partly due to lower profit margins attributable to affordable products by Eco Botanic and Eco Majestic. The impact of the lower margin products was however mitigated by lower selling and marketing expenses, as well as lower administrative expenses, incurred in 2Q17 as compared to 2Q16.

Continuous growth in sales

The group achieved sales totaling RM1.71bn in Nov-May-17 vis-à- vis RM1.32bn in Nov-May-16 from its Malaysia projects, an impressive growth of 29.6% from Nov-May. The significantly higher sales numbers from Klang Valley region (+93.4% yoy) was due to the successful launches of three new projects, namely Eco Grandeur, Eco Ardence and Bukit Bintang City Centre which collectively contributed RM1.08bn. For FY17, the group has set a sales target of RM4.0bn which we think is achievable. We expect 2H17 sales to be driven by central region’s new projects namely Eco Forest and Eco Business Park V. Total unbilled sales as of todate stands at RM6.32bn (including RM1.42bn from EWI).

Expect weak EWI contribution

For FY17, we are expecting EWI to report a total loss of c.RM100m (based on 27% equity accounting) due to upfront cost incurred for projects under development. Hence we are expecting ECW to assume at least RM27m losses to hits its P&L. As of 1H17, EWI achieved sales of RM1.05bn, however the company is only able to recognize the sales upon handover due to different accounting methods for overseas projects. We expect positive turnaround in 2018 when profit margins start normalizing for both EWI and ECW.

We downgrade to HOLD from BUY as we deem most of the positives have already been priced-in. We put our earnings for FY17 under review at this juncture. Our TP of RM1.56 is based on blended valuation of PER and PBV of 18x and 1.4x respectively. Despite HOLD call, we continue to be upbeat on the stock’s long term potentials as the group has successfully built a strong foundation in branding the Eco World name and attracting loyal buyers and supporters since it was listed three years ago.

Source: BIMB Securities Research - 16 Jun 2017