1H19 CNP of RM71.5m came below our (35%) and consensus (36%) expectations. 7M19 local sales of RM1.03b and its 27% associate, EWINT’s overseas sales of RM586m* are deemed broadly in-line due to timing of deliveries. No dividends, as expected. Both ECOWLD and EWINT are maintaining their sales target of RM12b* over FY19-20. We lower our FY19-20E CNP by 11%-15% to RM181-216m. Maintain OP with an unchanged TP of RM1.150.

1H19 results below. 1H19 CNP of RM71.5m came in below our (35%) and consensus (36%) expectations. Topline was within at 50%, but we believe the weaker-than-expected results were due to lower-thanexpected associate/JV contributions, mostly due to slower contributions from Malaysia joint venture projects (39% of our expectations), as well as higher than expected financing cost (60% of our expectations). 7M19 local sales of RM1.03b accounted for 34% of our FY19E local sales target of RM3.01b, but we deem this as broadly inline considering that sales generally picks up in 2H following historical trends from aggressive campaigning. EWINT (27% associate), recorded RM586m* sales over 7M19, which we also deem as broadly within our FY19E target of RM2.33b*, as the group expects to lock-in more London buildto-rent (BtR) projects, which will be lumpy. Both ECOWLD (local) and EWINT (overseas) are maintaining their combined sales target of RM12b* over FY19-20. No dividends, as expected.

Result highlight. QoQ, 2Q19 CNP was up by 36% to RM41m on positive topline growth of 11% driven by strong billings from Eco Majestic, Eco Forest, Eco Sanctuary and Eco Sky (in Klang Valley), Eco Botanic, Eco Spring, Eco Summer, Eco Business Park I, Eco Business Park II, Eco Tropics and Eco Business Park III (Johor) and Eco Meadows and Eco Terraces (Penang). EBIT margins were stronger (3.9ppt) on better development margins and a moderately lower financing cost (-2%). YoY-Ytd, topline was down marginally due to slightly lower recognitions (-3%). However, bottom-line increased by 35% on; (i) improved EBIT margins (+1.9ppt), (ii) associate/JCE profitability (vs. loss making previously) due to higher contributions from Malaysian joint ventures, and (iii) a lower effective tax rate of 25.7% (vs. 37.0%).

Outlook. The Group is maintaining its 2-year sales target of RM12.0b* over FY19-20, where ECOWLD targets RM6.0b local sales in FY19-20, while EWINT is also targeting RM6.0b* international sales over the same period. Going forward, we expect stronger earnings in coming quarters from strong contributions from ongoing projects as well as JCE projects, especially EWINT in 2H19. Both ECOWLD and EWINT are looking to declare their first maiden dividends in FY19, although details on pay-out ratios and dividend policies will only be made known towards the later part of FY19.

Lower FY19-20E CNP by 11%-15% to RM181-216m on lower contributions from JCE in FY19 on marginally lower project margins, and higher financing cost as we have been conservative on financing rates while we also anticipate higher financing cost from the potential adoption of IAS23** before July 2020. Unbilled sales of RM6.09b provide 2-3 years’ visibility.

Maintain OUTPERFORM with an unchanged Target Price of RM1.15. Our TP implies a FD SoP discount of 64% to its FD SoP of RM3.18. Our applied discount is pegged at the -2.0SD levels to its historical average which is at the lower end of our universe’s applied discount levels (-1.0SD to historical trough levels) given their relatively thinner margins and high net gearing. We believe this is a good time to accumulate ECOWLD given share price weakness (-9% YTD), while the stock is one of the YTD laggards amongst its peers for the year (+6% on average).

Source: Kenanga Research - 28 Jun 2019