Period

3Q15/9M15

Actual vs. Expectations

9M15 earnings of RM24.3m made up 52% of street’s full-year estimate and 65% of ours. We deem this as broadly within our expectation as we expect 4Q15 to see similar billings momentum as 3Q15.

10M15 sales was at RM2.37b which is within expectation, accounting for 79% of both our and management’s FY15E target of RM3.00b. Major drivers are from Klang Valley projects (57% of sales) like Eco Majestic, Eco Sanctuary while Johor (41% of sales) has fared well with projects such as Eco Spring, Eco Tropics and the Eco Business Parks (I & III).

Dividends

None as expected.

Key Results Highlights

QoQ, 3Q15 earnings was down by 20% despite a 9% increase in revenue. EBIT margin compressed by 2.0ppt to 4.5% due to higher marketing and administrative costs. Development margins were also slightly compressed on lower margin mix and substantially higher effective tax rate of 40.3% (2Q15: 33.2%) due to high amounts of non-deductible expenses.

Ytd-YoY comparisons are not reflective since there were no equivalent periods provided given the changes in financial yearend from September to October.

Outlook

ECOWLD is still targeting an IPO listing of EWI via the market capitalisation route by 1QCY16. To recap, the IPO aims to raise RM2.0b while ECOWLD is still interested to take-up a 30% stake. The new listing route enables EWI to be more marketable across a greater pool of investors.

The company remains confident of achieving its RM3.0b sales target for the year.

Change to Forecasts

No significant changes to FY15E but lowered FY16E earnings by 30%. In view of the challenging property market, we lower FY16E sales by 11% to RM3.2b but keep FY15E sales maintained at RM3.0b. We have also expedited our billings assumptions as billings to date were stronger than expected but this was more than negated by the higher cost structures from sales/marketing and administrative expenses and higher effective tax rate assumptions. Unbilled sales of RM3.99b provide two years visibility.

Rating

Maintain OUTPERFORM

Valuation

Lower TP to RM1.90 (from RM2.05) based on a wider discount rate of 45% (40% previously) to its FD RNAV of RM3.17. Although sales and earnings are on track, the sector’s sentiment has been severely affected by global and domestic economic uncertainties. Our big-cap developers (>RM1b) average FD RNAV discount rate has widened from 49% to 54% over the last three months. In view of the sector de-rating and ECOWLD’s higher-than-expected margin compressions which have led us to lower FY16E earnings, we opt to widen the discount applied to ECOWLD by the same quantum as the bigcap developer’s average. A slight premium is warranted to the sector’s average discount factor due to the group’s aggressive expansion plans, reputable management team and positioning as a township developer which will benefit from resilient demand. The stock was the third most heavily hammered stocks amongst the big-cap developers at –15.3% YTD vs. the KLPRP’s -7.5% YTD. This could present more compelling entry points as we still like the stock as a longer-term value emerging stock given its aggressive growth path and the reputable management team.

Risks to Our Call

Balance sheet risk. Weaker-than-expected property sales. Higher-than-expected sales and administrative cost. Negative real estate policies. Tighter lending environment. Delays in EWI listing.

Source: Kenanga Research - 18 Sep 2015