ECOWLD’s FY23 results beat expectations, growing 14% YoY on better margins and reduced overseas losses. It surpassed its FY23 sales target of RM3.5b with RM3.6b achieved. It sets a RM3.5b sales target in FY24, focusing on “Duduk” and industrial products. We raise our FY24F net profit forecast by 15%, but finetune down our TP to RM1.00 (from RM1.03) and maintain our MARKET PERFORM call.

Above expectations. ECOWLD’s FY23 core net profit of RM271.3m (adjusting for a one-off RM82.0m impairment on EWINT) beat our fullyear forecast by 11% and consensus full-year estimates by 6%. The variance against our forecast came largely from better-than-expected margins despite a high concentration on affordable products (i.e. Duduk).

YoY, its FY23 revenue increased by 9% due to sales being sustained at a high level throughout the year and the recognition of the 92-acre land sale in Eco Business Park II upon completion. Gross margin slightly improved at 24.2% (+0.2ppts) thanks to more of the same industrial products being sold. Higher interest income contributed to the 40% rise in other income, consequently resulted in a 17% growth in operating profit. On the flipside, while the group saw significantly lower losses attributed by EWINT on better forex performance, this was offset by higher finance costs (+27%) due to progressive rate hikes seen during the year. All in, ECOWLD’s FY23 core net profit of RM271.3m grew by 14%.

QoQ, its 4QFY23 revenue increased 77% from the higher completion rates booked in 4QFY23, although it did translate to a significant rise in marketing expenses (+382%) due to higher agent commissions tied to industrial product sales. This led to a 30% increase in core net profit despite higher losses attributed to EWINT during the quarter.

Briefing highlights. ECOWLD achieved full-year sales of RM3.6b in FY23, surpassing its sales target of RM3.5b. Despite this achievement, they maintain their FY24 sales at RM3.5b.

1. Sales target in FY24 is set at RM3.5b, with the focus to improve returns from its landbanks by achieving higher margins or maximizing yield of developed lands while continuing to sustain good dividends for shareholders. The group also appears to have a greater appetite for land acquisition, backed by their lower reported gearing of 0.25x.

2. EWINT, its 27%-owned joint venture, reported sales of RM1.2b in FY23, falling short of the full-year sales target of RM1.4b. The shortfall is attributed to the high interest rates in the UK. Despite recording a reduced loss in FY23 compared to FY22, caution prevails in future launches due to challenging conditions in the UK property market. Similarly, at the group level, the focus remains on prioritizing sustainable profits over aggressive top-line expansion.

3. "Duduk," its product line focusing on lifestyle-oriented offerings in matured townships, is gearing up for expansion in FY24. The launches will kick off in Iskandar Malaysia, commencing with Sa.Young D' Eco Botanic, followed by Santai D’ Eco Spring. Klang Valley is also set for additional "Duduk" launches in FY24, namely Riang D’ Eco Majestic and Se.Duduk D’Kajang.

4. On industrial products, specifically Eco Business Parks, Iskandar Malaysia contributed to 70% of industrial sales in FY23, which resulted in more than RM1.0b in a single year for the first time in FY23. The group is confident that this positive momentum will persist. With the upcoming launch of Eco Business Park IV in Kulai, Johor, planned for FY25, they are strategically positioned to seize the strong interest expressed by both local and international industrialists.

5. While the group has achieved success in the high-end market, they are strategically broadening their product range and increasing market share to cater to the demands of the Malaysian real estate market. Currently, ECOWLD has four diversified revenue pillars, which include Eco Townships, Eco Business Parks, Eco Rise, and Eco Hubs.

Forecasts. We raise our FY24F earnings forecast by 15% on a better gross margin on which we were previously cautious from possible dilution brought by the growing introduction of lower margin “Duduk” products. Margins are now expected to be more stable with the backing from its other pillars. Meanwhile, we introduce our FY25F earnings or RM295.0m which sees a modest earnings growth of 3.4% assuming the group remains consistent in delivering its product launch strategies and cost management going forward.

Valuations. We fine-tune down our TP to RM1.00 (from RM1.03) to reflect a lower RNAV following the favourable progress of its product pipeline amidst an unchanged 50% discount to RNAV (vs. an average of 55% for its peers). We had pegged a lower discount to ECOWLD as the group continues to see favourable take-ups for its launches across various segments. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We like ECOWLD for: (i) its strong branding attached to its products’ high quality, strong resale value, and well received contemporary designs, (ii) strong responsiveness to cater to market conditions with a highly flexible product portfolio (i.e. affordable homes, aspirational-priced homes), and (iii) timely presence to tap into Johor’s booming industrial scene. There is a good chance for a special dividend (we project to the tune of 7.0 sen/share assuming a 60% payout) following a lumpy dividend of RM214m from EWINT. However, it is likely that these merits have been priced in following the rally in the past few months, which could be also pegged to the anticipated dividend payments to EWINT. Maintain MARKET PERFORM.

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

Source: Kenanga Research - 15 Dec 2023