The BBCC Retail space will be acquired by the BBCC Retail Portfolio JV (50% owned by Mitsui Fudosan) for RM505.8m. This is expected and will provide a relief to ECOWLD’s balance sheet while impact to its FD SoP is minimal. No changes to estimates as the sale forms part of FY16E sales target. Maintain OUTPERFORM and TP of RM1.58.

JV agreement to acquire BBCC Retail Portfolio Space for RM505.8m (Mall: RM472.5m, Podium: RM33.3m).This follows the Heads of Terms entered between the BBCC JV (ECOWLD: 40%, UDA: 40%, EPF: 20%) and Mitsui Fudosan (Asia) Ptd Ltd (MFA) back in Mar 2016 to jointly develop BBCC Retail Portfolio (mall and podium). BBCC Retail Portfolio JV consists of MFA (50%), UDA (32%), ECOWLD (12%) and EPF (6%). We gather that BBCC Retail Portfolio carries a GDV of RM1.6b out of BBCC’s total GDV of RM8.78b. BBCC Retail Portfolio JV will buy the (i) Mall space of 1.35m sf and 2,400 car parks on a “land basis” at RM350psf and will construct it at the JV’s own cost, while (ii) the Podium space (40k sf) will be acquired on a completed basis (RM830psf).

Good for balance sheet and BBCC’s branding. The news is not unexpected given the earlier Heads of Terms. Nonetheless, we are positive as it helps to alleviate ECOWLD’s balance sheet burden because constructing the mall would tie up ECOWLD’s cash-flow as it will be kept for recurring income purpose by the BBCC Retail JV company while ECOWLD will only own an investment stake of 12% in this JV. Hence, more cash can be freed up for working capital of its saleable project. The mall will also be well managed by an experienced retail manager, namely MFA, which will be a strong feature of BBCC. However, we opt to maintain ECOWLD’s net gearing estimates (FY17E: 0.6x) at this juncture as we expect the group to deploy its resources to expediting on-going projects.

Outlook. Shareholders have approved the 25% placement recently which could see another RM0.77b funds (already imputed in our estimates) which will be partly used for taking up an associate stake of 27% in EWI which listing has been delayed to Dec 2016. While FY16E sales target of RM4.0b includes EWI sales (25%), there is no major earnings impact as EWI sales are based on completion rather than progressive recognition.

Earnings unchanged. ECOWLD will also recognize an effective sale of RM202.3m from this exercise, equivalent to 40% of the total consideration, which will be reflected in its FY16 sales. We are maintaining our FY16E sales estimate of RM4.0b (local: RM3.0b, EWI: RM1.0b) which is still in line with management’s target, and thus, no changes to earnings.

Reiterate OUTPERFORM. The net impact of the exercise to our FD SoP is minimal (-1.0 sen to RM2.91). Our TP remains at RM1.58 based on 51% Property RNAV discount and implied FD SoP discount of 46%. The group is likely to enjoy a slew of major news flow given its aggressive growth trajectory, including listing of EWI.

Downside risks to our call include: (i) weaker-than-expected property sales, (ii) higher-than-expected sales and administrative costs, (iii) negative real estate policies, and (iv) tighter lending environment.

Source: Kenanga Research - 14 Oct 2016