ECOWLD’s 1HFY23 net earnings of RM119.7m (+10%) came within expectations. 7MFY23 sales of RM2.4b seem to be well ahead of its RM3.5b full-year target. Despite market headwinds, the group believes it could still thrive with its affordable home offerings, and rising demand for industrial products. Maintain OUTPERFORM but raise our TP to RM1.03 (from RM0.83) as we ascribe a lower discount to our RNAV on its well-received projects pipeline.

Within expectations. 1HFY23 net profit of RM119.7m came in at 49% of our full-year forecast and 50% of consensus full-year estimate.

YoY, 1HFY23 sales was lower by 13% as relatively, 1HFY22 turnover benefited from larger completion of parcels. That said, better product mix led to improved gross margin of 25.8% (+3.6ppts) and flattish gross profit (+1%). Other income increased 33%, thanks to higher interest returns. On leaner marketing spend, operating profit grew by 8%. Meanwhile, international joint venture’s contributions improved following narrower operating losses. All in, 1HFY23 net profit came in at RM119.7m (+10%).

Briefing highlights. The group’s reported 7MFY23 sales of RM2.4b which translated to 69% of its FY23 sales target (RM3.5b). The group is confident in meeting its target but abstains from any adjustments for now.

1. The group’s “Duduk” products made up 4% of total sales, which it believes will continue to be well received given its emphasis on lifestyle offerings whilst located in matured townships. That said, such products are expected to carry lower margin per unit to keep prices attainable to first-time home buyers though compensated by a higher density profile. Aside from “Duduk” units, affordable homes (RM650k) made up 7% and 40% of total YTD sales, respectively.

2. Industrial products are gaining traction with growth in the light industrial and F&B manufacturing segments across its Eco Business Park parcels. The group also saw a strategic land sale of 92 acres in EBP II to Haitian Group, China. YTD, industrial sales of RM838m already exceeded FY22’s performance by 11%.

3. Fluctuations in raw material prices should be largely manageable, given the group’s fixed costs arrangement with contractors during engagement.

4. Its 27%-owned joint-venture EWINT achieved 7MFY23 sales of RM619m and is on track to meet its internal sales target of RM1.4b. Subject to meeting this target, EWINT intends to distribute RM900m dividends to its shareholders (ECOWLD’s effective share would be RM243m) with the first tranche of at least RM300m in CY23.

Forecasts. We maintain our FY23F/FY24F earnings for now.

Maintain OUTPERFORM with a higher TP of RM1.03 (from RM0.83). Our higher TP comes from lowering our discount to RNAV at 50% (from 60% previously which was in line with peers’ discount range). We believe the lower discount is fair given the group’s solid ability to push product launches. The group’s strong branding has enabled it to stay afloat of industry challenges while pending dividends from EWINT could attract the possibility of special 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 - 23 Jun 2023