ECOWLD surprised us with a 25% placement, which will be largely undertaken by its major shareholders. Funding is needed for EWI and other landbanking deals (e.g. pending Ijok land deal). It is a negative in the near term due to PER and RNAV dilutions but a longer-term positive from a balance sheet and landbanking perspectives, which is essential for ECOWLD, especially when it has one of the highest sales targets in town to maintain. Lowering TP to RM1.55 due to placement dilution while OUTPERFORM call remains as the share price is the biggest laggard amongst the big-cap developers while EWI’s listing should lend strength to share price performance.

Proposed 25% placement of up to 591.07m shares. Liew Tian Xiong (ED/major shareholder) and Sinarmas Harta S/B* (major shareholder) will undertake 76% of the placement (Tranche 1). The remaining 24% will be allocated to institutional investors or independent third party investor. This is to partly finance the subscription of EWI (up to 30% stake), followed by future land acquisitions and working capital requirements. Tranche 1 is fixed at RM1.30 while remaining tranche will be up to 10% discount to the 5-day VWAP. This could potentially raise c. RM768m. Top 3 major shareholders’ stake is likely to increase slightly to 66.9% (refer overleaf).

Big surprise, but necessary. We did not anticipate the cash call to come so quickly. Recall ECOWLD completed their RM2.8b fund raising exercises last year for the land injections and the 30% stake in EWI which listing is targeted for mid-2016. The local working capital requirements have intensified given their sales momentum while the company’s high net gearing will stay elevated until earnings normalize in 2017-18. For the major shareholders to undertake such a massive portion of the placement via external financing, which will be taxing on them, this demonstrates their long-term commitment to the company’s future growth.

Ijok land, the next deal. Back in Sept-2015, ECOWLD proposed to buy 2198.4ac in Mukim Ijok, Kuala Selangor for RM1.18b (GDV: RM15b). The group announced that they needed to source partnerships for funding and will ensure they maintain a minimum 30% stake. Since then, there have been no updates.

The placement effect… Impact on our FY16-17E estimates; (i) net gearing is expected to reduce from 0.75-0.80x to 0.42-0.48x; note that we have already imputed the equity value of the 30% stake of EWI into our balance sheet earlier on, (ii) EPS dilution of 20% each year, and (iii) PER dilution of 25% each year. Our SoP will be reduced by 10% to RM2.86 per share.

There are no adjustments to our earnings estimates. …with Ijok land, assuming the group takes up 50% stake in the Ijok SPV or RM0. 6b, i.e. maximum stake to ensure it remains an associate for balance sheet management reasons, and thus, impact to net gearing is only the cost of their investment in the SPV. However, if the group takes up more than 50%, net gearing will rise above 0.7x again. Timeline of significant earnings contributions from Ijok is unlikely to take place too early, and hence EPS and PER dilutions remain as per above; the project adds 8.0 sen our SoP to RM2.94.

Negative in the near term due to the heavy dilution effect on EPS and PER. With no near term earnings accretion to match the valuation dilutions effect, share price performance may suffer from this overhang; note that LTX and Sinarmas Harta are relying on external financing to fund the placement. However, it is a longer term positive for the group as the placement does alleviate balance sheet stress and allows the group to grab sizeable township landbanks even during current challenging conditions. Landbanking becomes very important for ECOWLD, especially when they already raked in the 2nd highest sales target in town.

Lowering TP to RM1.55 (from RM1.74) based on unchanged 46% for SoP discount (51% Property RNAV discount) to a lower FD SoP of RM2.86 from the placement dilutions effect. Note our SoP; (i) has yet to reflect the Ijok land until there is clarification of shareholding structure, (ii) includes the 30% stake in EWI where we DCF their UK and Australia projects lifetime profits. Amongst the big-boys, ECOWLD’s share price has been most bashed-down with YTD returns of -10.5% vs. the KLPRP @ +0.3% and big-cap developers’ average @ +1.8%. Last price of RM1.28 is also not too far off from its historical lows of RM1.20 since its RTO of Focal Aims back in 2013. 

Source: Kenanga Research - 29 Apr 2016