We are initiating coverage on ECOWLD with a OUTPERFORM recommendation and TP of RM2.05. Our TP only offers a 16% total return albeit applying a property RNAV discount of 35% (peer average: 50%). The lower-than-sector average discount is for their:(i) solid management team who are pioneers in property development, (ii) huge appetite for landbanking which will provide strong newsflow, (iii) ability to gain market share due to right product positioning as a township player and their experience with aggressive A&P. Resilience is seen in their on-going projects as take-up rates for recent launches have been strong at 80%-100% vs. industry average of 50%-60% within the first 3 months of launch. This will result in strong earnings growth of 420%-344% in FY15E-FY16E. Although normalization of PERs may take up to FY17 as property contributions are still at an early stage while net gearing is expected to remain relatively high at 0.57x-0.65x over FY15-16E, we still like the stock as a longer-term value emerging stock given their aggressive growth path and the management team. Expect ECOWLD to be a ‘must-have’ stock as we will not be surprise if it becomes a market leader.

Solid management team. The key management team behind Eco World Berhad is well experienced in quality township planning. They comprise well experienced industry professionals, most of whom have more than 10 years of experience in SPSETIA. Recently, Tan Sri Liew Kee Sin became Chairman in ECOWLD. We expect this to translate into strong demand for ECOWLD’s properties as property buyers these days are savvy and cognizant of the ECOWLD’s background, which will translate to a bigger market share.

A township developer. ECOWLD’s remaining GDV as at Feb-15 is RM51.2b, of which 83.5% of the remaining GDV are mixed developments/townships, while 16.5% make-up industrial business parks. The township developments include projects such as Eco Majestic, Eco Botanic, Eco Spring, Eco Tropics, Eco Sanctuary. We favour township developers as: (i) this segment enjoys resilient demand from genuine buyers like first-time home buyers and upgraders, and (ii) townships offer more value creation opportunities over the long-term, so value enhancement will be strong over the lifespan of the township, vs. niche or one-off developments. Note that the injected landbanks were done at decent prices (effective land cost is 12.8% of total GDV).

Strong newsflow as the group intends to embark on landbanking aggressively, including embarking on JV projects (e.g. BBCC) and into international frontiers (e.g. EWI SPAC). There were also numerous articles over the last one year as ECOWLD is undertaking simultaneous launches and hosting events as part of their aggressive marketing strategy. We expect the group to continue building its war-chest of projects either on; (i) a JV front to alleviate balance sheet weight (ii) outright purchase of land, which may require higher net gearing or fresh cash calls in the next 2 years.

20% placement is next. The group has recently completed its rights issuance and we note that share price is easing up from its highs, which will present cheaper entry points for investors. Now the group is pursuing the last part of the corporate exercise, which will raise another RM634.4m. This will help improve shareholding spread and bring in institutional investors.

Risk. Normalization of PERs may take up to FY17 as property contributions are still at an early stage, while FY15-16E net gearing is expected to remain relatively high at 0.57x-0.65x even post placement. We expect strong earnings growth of 420%-344% in FY15E-FY16E as ‘maiden’ contributions from the private entity will be felt once the asset injection is completed (2Q15). The Group has secured strong sales of RM3.2b in FY14, and expects RM3.0b-RM4.0b in FY15-FY16, vs. our sales estimates of RM3.0b-RM3.6b, respectively. Unbilled sales of RM3.1b provides 2-2.5 years visibility.

Initiating coverage on ECOWLD with a OUTPERFORM and ex-all fair value of RM2.05 based on RNAV-DCF @ 10% WACC and after accounting for the entire major corporate exercise, full conversion of warrants, potential GDV from the EWI SPAC and the BBCC JV. We are assuming 35% property discount factor or a premium to our big developers’ average of 50% for the reasons mentioned above. At an ex-all fair value of RM2.05, it provides potential upside of 16% to the TEAP last price of RM1.77. 

Source: Kenanga Research - 15 Apr 2015