EWI is expanding its footprint in Melbourne, Australia with Salcon Development (80%:20% basis) in Yarra One project (GDV: AUD218m) which has a land cost of AUD37.9m. We are positive but not surprised as we have built-in GDV replenishment for EWI, but we raised FY17- 18E sales by 4-1%. All in, we lower EWI earnings by <1%. Maintain OUPERFORM and TP of RM1.72.

Second project in Australia, first in Melbourne. Eco World International (EWI)?s wholly-owned subsidiary, Fortune Quest, has entered into a conditional share SPA with Salcon Development, a wholly owned subsidiary of Salcon Berhad, for AUD120,000 (RM400,896) to acquire 80% of the issued and paid up capital of the PropCo (refer overleaf diagram). The PropCo will in turn acquire the Claremont Street Project land for AUD37.9m (RM126.5m). The PropCo will undertake the development of Yarra One (currently known as Claremont Street Project), located on a 2,128 sqm (22,905.6sf) freehold land at 16-22, Claremont Street, South Yarra, Victoria, Australia. The project will be developed into a 27-storey tower with 268 residential units complemented by a retail and office podium with an estimated GDV of AUD218m (RM728.3m) and slated for completion by 2H20. The acquisition of the land and launch is expected by 2QCY17 (refer overleaf diagram).

Land cost to GDV ratio at 17%. Based on a purchase consideration of AUD37.9m by the PropCo (on 29th Mar 17), the Yarra One project in Melbourne has a land cost to GDV ratio of 17% vs. 13% for EWI?s West Village Parramatta, Sydney project and is on par with the appraised valuation by Knight Frank Victoria Australia. We believe Yarra One?s land cost to GDV ratio is reasonable considering it is prime land located only 5.3km from Melbourne?s central business district (CBD) while West Village Parramatta is located further away from the city at 24km west of Sydney?s CBD. We believe the group will be able to achieve low-mid teen pretax margins.

Positive but not surprised as we have built-in GDV replenishment assumptions of RM8.0b for EWI as we expected aggressive landbanking in the next 12-18 months. Post land acquisition, EWI?s FY17E net gearing will increase to 0.11x from 0.05x while FY18E net gearing will rise to 0.18x from 0.08x once Yarra One?s development costs kick in. Nonetheless, its balance sheet is still relatively light and expected to go back into net cash in FY19 upon other project deliveries.

We raised EWI?s FY17-18E sales assumptions by 4-1% to RM3.14- 3.15b to factor in Yarra One sales while cautiously toning down take- up rate assumptions for its London projects. EWI?s FY17-18E earnings are marginally lowered by less than 1% after considering marketing costs for YarraOne while project contributions will likely be felt between 2020 and 2021. This has no significant impact on ECOWLD?s earnings.

Maintain OUTPERFORM and TP of RM1.72 on ECOWLD based on a 46% SoP discount to its FD SoP of RM3.18 (property discount of 51%). We built in Yarra One?s contribution (c. 1 sen of EWI?s fair value) and also reduce GDV replenishment assumptions by 9% to RM7.3b, resulting in no changes to EWI?s fair value of RM1.33 using 23% SoP discount to EWI FD SoP of RM1.72. We expect ECOWLD and its associate, EWI, to benefit from newsflow arising from their respective aggressive expansion plans.

Source: Kenanga Research - 11 Apr 2017