1H17 CNP of RM55.1m was within our expectation but below market. 7M17 sales of RM1.71b came broadly within, while their 27% associate, EWINT, saw RM1.38b sales which is behind our target. No dividends as expected. FY17E sales target of RM4.0b is intact while EWINT has introduced its new sales target of RM2.5b. Downgrade to MARKET PERFORM with unchanged TP of RM1.72 due to recent share price rally.

Within our but below market expectation. 1H17 CNP of RM55.1m was below market but within our expectation at 35% of street consensus, and 49% of our FY17E estimates. We believe market may be overly optimistic with group margins. ECOWLD chalked up RM1.71b (RM1.40b) sales over 7M17 (1H17) which made up 43% of management and our local sales target of RM4.0b**, and we deem it as ‘broadly within’ due to timing of launches. EWINT achieved 7M17 sales of RM1.38b* (1H17: RM1.05b) which made up 44% of our FY17E sales target of RM3.14b and 55% of management’s newly revealed target of RM2.50b. No dividends, as expected.

Higher finance cost. QoQ, 2Q17 CNP of RM33.7m was up by 58% on improved billings (+13%) and reduction in administration expenses (-22%) resulting in a 1.1ppt expansion in EBIT margins to 10.1%. Furthermore, effective interest rates rose to 32.6% from 11.7% due to non-deductible expenses while interest rates are expected to be closer to the statutory rate once earnings normalize. YoY, 1H17 CNP marginally declined (-1%) albeit billings improvement (+17%) as finance cost rose by 166% to RM26.1m on equity financing arising from its associate projects/EWINT. Net gearing is now at 0.70x (1Q17: 0.54x).

Outlook. The group remains confident of meeting its sales targets. In terms of new launches, the group intends to roll out Eco Business Park V, Eco Forest and Eco Horizon/Sun in 2H17.

No changes to estimates. While we scale down EWINT’s FY17E sales by 19%-18% to RM2.53b-RM2.67b, there is no major impact to EWINT earnings as we have tone down take-ups from projects, which will only start contributing from FY19 onwards. Unbilled sales of RM6.32b (local: RM4.90b, EWINT: RM1.42b at effective stake and project levels) is an industry high, providing 2-3 years of earnings visibility.

Downgrade to MARKET PERFORM with unchanged TP of RM1.72. Our TP is based on 51% property RNAV discount or implied 46% SoP discount to its FD SoP of RM3.18. YTD, share price has risen by 27.6% vs. the KLPRP index 16.9% and ECOWLD is the second highest YTD gainer amongst the big-cap developers. This is in line with our tactical sector upgrade to OVERWEIGHT and value boost from EWINT’s listing. While we still like ECOWLD for its branding strength, aggressive growth strategies, ability to grab market share and strong management team, we think the recent share price momentum has been overly aggressive, potentially driven by M&A speculations. Hence, we downgrade our call from OUTPERFORM to MARKET PERFORM and will review our recommendation if there are catalytic news (e.g. M&A), sales/earnings surprises or sharp retracement in share price.

Risks to our call include: (i) weaker/stronger-than-expected property sales, (ii) lower/higher than expected sales/administrative and finance costs, (iii) changes in real estate policies, and (iv) changes in lending environment.

Source: Kenanga Research - 16 Jun 2017