News

Eco World (ECOWLD) announced that it has received a Letter of Award (LoA) from Penang Development Corporation (PDC) to develop a 449.6ac parcel leasehold land in Bandar Cassia, Batu Kawan, Penang. The land is located close to the Second Penang Bridge and was acquired for a total consideration of RM796.3m. (refer overleaf)

Comments

We were not surprised by the acquisition as both the media and our recent IC report have speculated on this news.

Rationale for this acquisition is geographical diversification and to expand ECOWLD’s exposure to Penang.

The land has a potential project GDV of RM10.0b and will likely be a mixed development. Significant earnings impact will likely be from FY18E onwards as expected launch is in FY17. The project will increase ECOWLD’s remaining GDV by 19.5% to RM61.2b. Penang will also make up a bigger composition of group’s GDV at 18.7% (2.8% previously).

Land cost is decent, in our view, considering: (i) land cost to GDV is at 8.0% vs. ECOWLD’s average of 12.8% and developers’ norms of 10%-15%, (ii) implied price of RM56psf (RM41psf net of golf land) vs. the recent transaction by Paramount at RM50psf (Mar-14). Positively, land purchase price repayment is progressive over 48 months (refer overleaf), which will help alleviate balance sheet stress.

We are neutral for the near-term outlook but positive in the longer run. Land price is decent while repayment is progressive. However, funding is crucial as ECOWLD’s net gearing is high at 0.57x-0.65x (post placement and EWISPAC/ BBCC obligations) while earnings will only be felt from FY18 onwards. Based on the progressive payment schedule, we expect FY15-16E net gearings to increase to 0.59x-0.67x. If the group continues on this aggressive landbanking path, we reckon it will increase the possibility of a cash call next year (refer overleaf).

Outlook

ECOWLD has recently completed its rights issuance and listing of Rights share on 31st March 2015, and a 20% placement is up next. The placement will raise another RM634.4m and will help improve shareholding spread and bring in institutional investors.

Forecast

No change to earnings estimates. (refer overleaf)

Rating

Maintain OUTPERFORM

Valuation

Maintain OUTPERFORM with unchanged TP of RM2.05. Although this project increases our FD RNAV by 7.5% to RM3.17, we opt to maintain our TP at RM2.05 as we assume a wider discount rate of 40% (from 35%) largely due to their increasing net gearing. Our applied RNAV discount is at a slight premium to our sector coverage’s average of 50% due to the group’s aggressive expansion plans, reputable management team and positioning as a township developer which will benefit from resilient demand.

Risks to Our Call

(i) Balance sheet risk, (ii) weaker-than-expected property sales, (iii) higher-than-expected sales and administrative costs, (iv) negative real estate policies and (iv) tighter lending environment.

Source: Kenanga Research - 22 Apr 2015