ECOWLD is entering into a 50:50 JV to develop a 533.9ac land located across Setia Eco Park for RM303.5m. Land cost to GDV ratio is fair at 15% based on a GDV of RM8.58b and implied land value of RM1.29b. Meanwhile, the RM10b GDV Eco Marina project is off the table due to viability issues. Although this resulted in FD RNAV being reduced slightly by 4%, we are also relieved as FY17E net gearing drops to 0.44x from 0.48x and also believe the project is a sure winner. No changes to earnings forecasts. Maintain OUTPERFORM with lower TP of RM1.49.

Proposed 50:50 JV to develop 533.92ac freehold land in Mukim Bukit Raja between ECOWLD and Cascara S/B. The agreed value of the land of RM1.29b (RM55.57psf) is close to the market valuation of RM1.30b; net of retained cash and liabilities, ECOWLD’s purchase consideration amounts to RM303.5m for its share in the JV company. The deal should be completed by year-end. The group estimates a project GDV of RM8.58b implying a land cost to GDV ratio of 15.1%, which is considered fair as recent land transactions has been done in the low to mid-teens; we estimate 15% pretax margins for the project.

On familiar grounds. The land is located opposite of Setia Eco Park next to Setia Alam. The project will be earmarked as an aspirational township project as the group lacks exposure in this segment and will be called Eco Ardence. It also means a new presence along the central spine of Klang Valley (i.e. along the NKVE) which is a key population catchment area. Project details like pricing/unit sizes are not available as project plans are still in the works, but we gather that the development should comprise mainly residential with a small portion of commercial component. We believe the group is familiar with the area and should be able to roll out the project soon with launching expected by 2017.

Eco Marina deal rescinded. Yesterday, the group announced that they and Penang Development Corporation (PDC) have mutually agreed to rescind the letter of award for the development of 449.6ac land in Bandar Cassia, Batu Kawan, Penang. This was due to the golf course (initially 150ac) requiring significantly more land area, which adversely impacted the viability of the project. The project GDV was RM10b while the land cost was RM796m (20% p.a. over 5 years). The initial deposit of 20% will be fully refunded.

Positive on Eco Ardence. Taking into account the acquisition of the 50% stake in Eco Ardence and removing Eco Marina from our estimates; (i) FY16E net gearing remains unchanged at 0.42x but FY17E net gearing is reduced to 0.44x from 0.48x, (ii) our FD SoP is reduced by 5% to RM2.73, (iii) no changes to earnings estimates* as sales targets of RM4.0b-RM4.5b remain intact as the group will be ramping up other launches while Eco Ardence will be a major sales driver from 2017 onwards. Note that this will be accounted as an associate project i.e. gearing will be off balance sheet. While there is some reduction in our FD SoP, we still prefer this deal over Eco Marina as it is less taxing on its balance sheet. Additionally, Eco Ardence is within an established population catchment area and we expect strong sales from the project.

Maintain OUTPERFORM with a lower TP of RM1.49 (from RM1.55) based on unchanged 51% Property RNAV discount (implied FD SoP discount is 45%) to a lower FD SoP of RM2.73. Note our SoP: (i) has yet to reflect the Ijok land and we expect to get updates on the project during their upcoming results briefing, (ii) includes the 30% stake in EWI where we DCF their UK and Australia projects' lifetime profits. The group’s listing of EWI is scheduled for 3QCY16. The group is set to benefit from a few major news flows this year, particularly significant when there is no major excitement in the sector.

Source: Kenanga Research - 10 Jun 2016