ECOWLD’s 9MFY22 CNP met expectations while sales surprised to the upside thanks to the disposal of a hotel at Bukit Bintang City Centre (BBCC) for RM295m. We like ECOWLD for its strong branding and nimble cost structure, enabling it to continue to fetch healthy sales and margins despite the still challenging industry landscape. We maintain our FY22F earnings and raise that of FY23F by 3%. We keep our TP of RM0.83 and OUTPERFORM call.

Within expectations. 9MFY22 CNP came in at only 66% and 71% of our full-year forecast and the full-year consensus estimate, respectively. However, we consider the results within expectation as we expect a stronger 4QFY22 on: (i) acceleration in progress billings as labour shortage eases, and (ii) moderating losses from 27%- owned EWINT JV.

Sales outperformed. ECOWLD’s 10MFY22 sales of RM3.44b beat our RM3.3b target and the company’s internal RM3.5b target. The positive deviation stemmed from the sale of a hotel at BBCC for RM295m to UDA Holdings. Consequent to the outperformance, we raise our FY22F sales assumption to RM3.9b (from RM3.3b). As of Aug 2022, ECOWLD’s effective unbilled sales stood healthily at RM4.2b.

Highlights. 9MFY22 revenue rose by 8%, rebounding from a pandemic stricken period a year ago. Coupled with stronger GP margin (+4ppts) from cost savings recognition and lower marketing (- 7%) and financing costs (-15%), CNP rose by 11% despite EWINT JV registering losses.

Outlook. With an improving balance sheet (0.35x net gearing) and well managed cash flows, ECOWLD is on the lookout to acquire new land banks to replenish their total remaining GDV of c.RM57b.

Margins-wise, the company aims to maintain >20% GP margins despite the challenging headwinds ahead, i.e. rising interest rates coupled with higher raw material costs. We think such margins for the group are very achievable given its impressive product innovation (higher price per square feet but smaller area), prudent marketing expense, lean workforce and most importantly – its strong branding which allows for some degree of pricing power in this weak property market.

Meanwhile, ECOWLD guides that the ongoing labour shortages are manageable and works at sites have been progressing as planned.

Forecasts. Keep FY22F earnings unchanged but increase FY23F earnings marginally by 3% on higher FY22F sales target of RM3.9b (previously RM3.3b).

Maintain OUTPERFORM with unchanged TP of RM0.83 based on 60% discount to RNAV – in line with peers’ discount range of 60- 65%. We continue to like ECOWLD for its ability to manoeuvre current headwinds and defend margins given its strong branding and nimble cost structure. Consequently, this translates to strong cash flow generation and allows for consistent dividends. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Risks to our call include: (i) a prolonged downturn in the local property market, (ii) rising mortgage rates hurting affordability, (iii) rising construction cost, and (iv) risks associated with overseas operations.

Source: Kenanga Research - 19 Sept 2022