1Q18 CNP of RM24.1m and 4M18 sales of RM602m are both considered broadly within expectations, largely due to the fact that 1Q is typically the weakest quarter. No dividends as expected. Management maintained local sales target at RM3.5b but increased EWINT target to RM3.0b. No changes to earnings. Lower TP to RM1.30 as we apply a temporary risk premium but upgrade our call to OUTPERFORM due to the recent overdone sell-downs.

1Q18 CNP of RM24.1m came broadly within expectations at 13% of full-year estimates as we expect bulk deliveries in 2H18 – they target to complete another 4,700 units in FY18. Furthermore, we note that 1Q tends to contribute less than 20% of full-year earnings. 4M18 local sales of RM602m only made up 17% of management’s and our target of RM3.50b each, which is also deemed as broadly within, considering the festive/holiday periods and the stunning 4Q17 sales performance. Its associate, EWINT, has achieved RM243m sales in 4Q18 or 12% each of management’s and our target of RM2.0b, again due to seasonally weak 1Q sales activities (refer overleaf for more details on EWINT). No dividends, as expected.

JVs turning into the black. QoQ, 1Q18 CNP dipped by 24% on slower billings, which is typical for 1Q. However, we note an improvement in its EBIT margins to 11.2% (+1.2ppt) as there were significant reductions in A&P expenses (-80%). YoY, 1Q18 CNP was up by 13% as the share of associates/JVs losses narrowed significantly as the Malaysian JVs are now turning into the black. Net gearing increased to 0.74x (1Q17: 0.55x).

Sticking to a FY18E local sales target of RM3.5b but its associate, EWINT, has raised its target to RM3.0b from RM2.0b due to the recent acquisition of the new Be Living sites in London. Emphasis will be on execution and township occupancy in FY18 while land banking news is likely to be quieter. EWINT has completed Stage 1 acquisition of the Be Living sites and has entered into a conditional SPA for the Stage 2 acquisition. On the back of their bulky project deliveries this year, we expect FY18E net gearing to reduce to 0.61x. Earnings are kept unchanged (refer overleaf).

Applying a temporary risk premium. We are in the midst of reviewing our valuations for developers which are experiencing a de-rating on the back of fears of interest rate hikes and oversupply issues. Ahead of our valuation re-basing exercise, we lower our TP to RM1.30 (from RM1.50) by applying a temporary risk-premium to our FD SoP discount and consequently widening it to 59% (from 53%) to an unchanged FD SoP of RM3.18; the risk premium will be removed when market volatility subsides. The applied discount is aggressive for a developer who has activated almost all of its land bank but this also takes into account their high net gearing. Upgrade to OUTPERFORM from MARKET PERFORM as we think the recent sell-down is overdone (-27.5% YTD) vs. the KLPRP (-11.8% YTD). Fundamentally, ECOWLD is still on track to see stronger profits in the coming quarters due to the normalisation of earnings. However, we do note investors’ current aversion towards the real estate sector which could cap share price recovery until market uncertainties clear up. The main risk to our recommendation is potential cash-calls if attractive land banking opportunities arises; but for now, it appears management will be focusing on execution this year rather than land banking. In the event of any cash-calls, we will look to de-rate valuations further. The other major risk is any headline sales or earnings disappointment, which could push valuations lower.

Source: Kenanga Research - 30 Mar 2018