Eco World Development Group (EcoWorld) held a briefing last Friday on their proposed asset acquisition, share split and fund raising. The well-attended briefing was presented by its President and CEO, Dato’ Chang Khim Wah. Post the exercise, the group’s total GDV is RM43.5b spanning over 4433ac with an estimated market cap of RM4.23b. They will also be in a strong net cash position, enabling the group to embark on aggressive land banking drive. It is still unclear if Tan Sri Liew will join EcoWorld once his stint in SPSETIA ends on 30/4/14, although we take the view that he will likely helm EcoWorld eventually.

The group is targeting FY14-15E sales of RM2.0b-RM3.0b and we have projected earnings of RM52m*-RM203m. We have also derived a FV of RM2.27, which provides 27% upside to its TEAP of RM1.79. We intend to initiate coverage on the stock, pending a meeting with management.

Total Group GDV of RM43.5b (remaining GDV: RM42.4b) post acquisition, which spans over 4433ac (remaining: 4292ac). The total consideration for the land acquisition from Eco World S/B amounts to RM3.83b, equivalent to c. 70% of the enlarged group’s GDV. The net consideration works out to be RM1.78b after taking into account bank loans of RM2.0b. The consideration will be funded by the share subscriptions by Eco World Development Holdings S/B and Sinarmas Harta S/B and rights issuance. The acquisition implies land cost to GDV ratio of 12.8%, which is considered fair considering that many land acquisitions tend to make up 10%-15% of GDV. Post the exercise, we can expect a public shareholding spread of 27.9%.

Estimated market cap of RM4.23b post-corporate exercise (before warrants conversion), making it the 5th largest developer under our coverage. EcoWorld’s GDV/mkt cap ratio of 10x is more compelling against its peer (developers above RM3b market cap) average of 8.3x. Assuming a 15%-20% YoY growth in sales, we estimate that its group’s GDV will provide up to 7-9 years earnings visibility.

Net cash position means more room for land banking. Post the corporate exercises (before warrants conversion), the group will be in a net cash position of 0.25x with a cash pile of c.RM1.0b. Assuming that EcoWorld can gear up to 0.3x net gearing level, which is extremely comfortable for most developers, the group can afford to borrow another RM1.7b for land banking. Assuming that land cost is around 12% of GDV, this could imply an additional RM14b GDV for the group. We do expect the group to continue land banking aggressively.

Will Tan Sri Liew join EcoWorld? Tan Sri Liew’s stint in SPSETIA will end on 30/4/14. While there was no mention of Tan Sri Liew joining EcoWorld during the briefing, we strongly believe that he will do so in the near future. We believe investors will be pleased to see Tan Sri Liew in EcoWorld and expect him to replicate SPSETIA’s business model closely, implying that the stock could be trading at premium valuations against its peers.

EcoWorld targets FY14-15E sales of RM2b-RM3b. To date, the group has already secured impressive sales of RM1.13b since Sep-13. Our projection of earnings for FY14,15,16E are RM52m*, RM203m, RM497m based on sales of RM2.0b, RM3.0b and RM3.5b, respectively. Since FY14E earnings may not be representative, we look towards FY15E PER of 20.8x which is still at a significant premium to its peer’s average of 11.7x. However, we believe EcoWorld may command a premium due to its management’s background and of course, if Tan Sri Liew assumes the helm of EcoWorld. Additionally, the group’s earnings growth rate will be much stronger, given its low base effect, which would warrant a higher PER, especially when FY16E PER is lowered to 8.5x.

Ex-all fair value of RM2.27 based on RNAV-DCF @ 10% WACC and assuming 35% discount factor. At an ex-all fair value of RM2.27, it provides a share price upside of 27% to the TEAP last price of RM1.79. Assuming the group fully utilises its placement funds and increases its net gearing to 0.3x, this could increase its GDV by another RM14b. If so, EcoWorld’s ex-all fair value would increase to RM2.51.

Source: Kenanga