9M19 CNP of RM122m came below our (67%) and consensus (64%) expectations. 10M19 local sales of RM1.9b (64% of FY19E) and 27%-owned associate EWINT’s overseas sales of RM773m* are deemed below expectation. No dividends, as expected. Both ECOWLD and EWINT are maintaining sales target of RM12b* over FY19-20. We lower our FY19-20E CNP by 5%-3% to RM172-209m. Maintain OP with a lower TP of RM0.750.

Below expectations. 9M19 CNP of RM122m came in below our (67%) and consensus (64%) expectations. Top-line came in within, but bottom-line missed our expectations on lower-than-expected associate/JV contributions (58% of our expectations), as we were more bullish on contributions from the Malaysia joint-venture projects and EWINT. 10M19 sales of RM1.94b was also below forecast at 64% of our FY19E local sales target of RM3.01b. EWINT (27% associate), recorded RM773m* sales over 10M19, which we also deem as below our FY19E target of RM2.38b*, but we believe the bulk of sales may be back loaded to FY20 as it is expected to be lumpy from London build to-rent (BtR) projects, and also given the challenging London market prior to the Brexit outcome. No dividends, as expected.

Result highlight. YoY-Ytd, top-line was up marginally by 2% on increased recognitions. However, bottom-line increased by 51% on the back of: (i) higher other operating income (+51%), (ii) higher associate/JCE contributions (+335%) from increased contributions from the Malaysian projects such as Eco Grandeur & Eco Business Park V, Eco Horizon, Eco Ardence and Bukit Bintang City Centre (BBCC), as well as a jump in contributions from EWINT (vs. loss making previously), and (iii) a lower effective tax rate of 24.5% (vs. 31.4%). QoQ, top-line was down by 4% on slightly lower recognitions this quarter. However, bottom-line was up by 23% mainly from increased contributions from associate/JCE contributions (172%) and on the back of lower effective tax rate of 22.8% (vs. 26.4%).

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 driven by healthy contributions from ongoing projects as well as JCE projects, especially from EWINT in 4Q19 onwards. Both ECOWLD and EWINT may look 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 5%-3% to RM172-209m. Unbilled sales of RM5.9b provide 2-3 years’ visibility.

Maintain OUTPERFORM but on a lower Target Price of RM0.750 (from RM1.15). Our TP implies a higher FD SoP discount of 67% (from 64%) and on a lower FD SoP of RM2.28 (from RM3.18) as we lower project margins closer to current levels. Our applied discount is pegged at the -2.0SD levels to its historical average which is at the lower-end compared to our universe’s applied discount levels (which are between -1.0SD to -2.0SD) given its thinner margins and high net gearing. The increased discount is also in line with weaker sentiment attached to the property sector which has caused the KLPRP to decline by 10%. However, we believe this is a good time to accumulate ECOWLD as it has been a laggard amongst peers declining by 31% YTD while comparable peers have only declined by 10% on average and is trading at a PBV of 0.4x vs. peers of 0.4-0.6x. We are comfortable with our OP call as we expect earnings to kick in mostly in FY20, while a commitment to dividends via a policy would affirm our call as well as act as confirmation for better earnings ahead.

OTHER POINTS

Lower FY19-20E CNP by 5%-3% to RM172-209m. We lower our FY19E CNP as we push back our sales and recognitions to FY20 for the Malaysian joint-venture projects, and on lower JCE contributions due to lower-than-expected EWINT sales and recognitions. Additionally, we lower margins closer to current levels of 11% PBT margins (from 13% previously). All in, we reduced FY19 sales target to RM2.7b (from RM3.0b) and increase FY20E sales to RM3.3b (from RM3.0b). Note that ECOWLD is maintaining its sales target of RM6b* over FY19-20 and as such we believe sales would be back loaded to FY20. Unbilled sales of RM5.9b provide 2-3 years’ visibility.

EWINT’s results highlights. EWINT registered sales of RM773m in 10M19 that came in below expectation, at 33% of our FY19 target of RM2.38b* while management is targeting RM6b* collectively in FY19-20 (note that individual year’s sales targets were not provided) as challenging market conditions in London and political uncertainties surrounding Brexit have caused potential buyers to defer purchases. 9M19 CNP of RM68.7m* (38% of our FY19E of RM181m) is deemed below as we were expecting strong contributions in 2H19 from the delivery of London City Island (LCI)’s remaining residential blocks from mid-FY19 and Embassy Gardens Block A05 in 2H19 but reckon that part of these recognitions may be pushed to FY20.

YoY-Ytd, EWINT has turned profitable to RM68.7m* from a CNL of RM23.8m* in 9M18 on revenue commencement and profit recognition from its United Kingdom projects namely London City Island following the completion and handover of units sold to customers and profit recognition of EcoWorld London’s Built-to-Rent (BtR) sales.

Going forward, due to tough market conditions in the United Kingdom, the Group plans to expand its BtR footprint and is in talks with big funds from US, UK and Malaysia to help lock-in sales at an earlier stage prior to completion of construction. This would help EWINT to quickly achieve its sales targets. We trim EWINT’s FY19E earnings by 29% to RM131m on slower sales to RM2.1b (from RM2.38b) due to the challenging market and the wait-and-see approach taken prior to Brexit, and lower recognitions in FY19 mainly from Embassy Gardens which would materialise mostly in FY20 vs. our expectation of FY19 previously. As a result, we increase FY20E earnings by 4% to RM496m on the back of higher sales target of RM3.4b (from RM3.0b). This is on the back of a lower forex rate of £1:RM5.02 FY19-20 closer to current levels, (from RM5.35).

Risks to our call include: (i) weaker-than-expected property sales, (ii) higher-than-expected overheads/finance costs, (iii) timing of EWI project deliveries, and (iv) changes in real estate policies/lending environment.

Source: Kenanga Research - 20 Sept 2019