ECOWLD held a briefing on their proposed acquisition of 2,198.4ac of leasehold land in Mukim Ijok, Kuala Selangor for RM1.18b. The project’s GDV is RM15b (township and business park). Rationale for this acquisition is to increase its exposure in the more resilient market in Klang Valley and target population catchment areas of North-East Klang Valley and also the fact that such sizeable Klang Valley landbanks is a rare opportunity. The group is seeking partnerships for funding as part of their efforts to grow their landbank without overtaxing their balance sheet. In our base case scenario where ECOWLD is only a 50% associate in the Special Purpose Vehicle (SPV), its equity commitment will only increase FY16E net gearing to 0.78x from 0.73x while our FD RNAV will be upped by 2.3% to RM3.25. Details of the potential partnerships are not available but we gather talks are in advanced stages. We are longer-term positive on the acquisition, as long as they are able to secure the right partners and do not assume more than an associate stake in the project for balance sheet management reasons. Until we have some concrete news on the project partners, we have opted to exclude this project from our valuations and estimates. Maintain OUTPERFORM and TP of RM1.90 based on a discount rate of 45% to its FD RNAV of RM3.17.

Proposed acquisition of 2198.4ac leasehold land in Mukim Ijok, Kuala Selangor for RM1.18b (RM12.34psf) from 5 vendors with expected completion in 2QCY16. The project GDV is RM15b and we gather that the project is similar to Eco Tropics: (i) the Eco Gardens township (1,680ac, GDV RM12.2b) which targets the affordable market (units to be initially priced between RM400-500k/unit), and (ii) Eco Business Park V which is an industrial park within the township (519ac, GDV RM2.8b). The land cost is fairly attractive (refer overleaf). The acquisition increases the group’s remaining GDV by 25% to RM75.4b (non-effective).

We were taken by surprise by the magnitude of the land size especially when ECOWLD’s net gearing is expected to exceed the comfort levels of 0.5x over the FY16-17E. Partnerships as funding avenues. If the group undertake the development on its own, FY16E net gearing will increase from 0.73x to 1.09x. We gather that the land acquisition will be at an SPV level where ECOWLD will invite selected institutional/PE/JV parties to participate in the SPV as part of their efforts to grow their landbank without overtaxing their balance sheet, while ECOWLD will retain a minimum 30% stake. Although ECOWLD is said to be in advance discussions with selected partners, details of their eventual stake and timeline is not yet known. In our base case scenario where ECOWLD only a 50% associate exposure in the SPV, (i) its equity commitment will only increase FY16E net gearing to 0.78x from 0.73x which is still manageable considering that it will take up to FY17 for property earnings to normalize, (ii) increases our FD RNAV by 2.3% to RM3.25.

We are longer-term positive on the acquisition, as long as ECOWLD are able to secure the right partners and do not assume more than an associate stake in the project for balance sheet management reasons. We believe this model is one of the best ways to grow their brand and future project earnings without overtaxing their balance sheet. If they do take on a subsidiary stake in this project, we do not discount the possibility of cash calls which would be dilutive to shareholders’ returns. For now, there are no changes to earnings as project contributions will only be significant from FY17 onwards.

Maintain OUTPERFORM. Until we have some concrete news on the project partners, we have opted to exclude this project from our valuations and estimates. Maintain TP of RM1.90 based on a discount rate of 45% to its FD RNAV of RM3.17. Our applied discount is at a slight premium to big-cap developers’ RNAV discount average of 54% due to the group’s aggressive expansion plans, reputable management team and positioning as a township developer which will benefit from resilient demand. ECOWLD is still targeting an IPO listing of EWI via the market capitalisation route by 1QCY16.

Source: Kenanga Research - 23 Sep 2015