ECOWLD is acquiring 240.3 acres land in Pulai, Johor Bahru for RM450.1m. The land has a preliminary GDV of RM3.88b and is adjacent to its Eco Botanic and Eco Botanic 2 developments, supplementing the townships there which have enjoyed high takeup rates. We maintain our forecasts and TP of RM1.00 but downgrade our call to UP (from MP) as the recent price rally could have been overdone despite ECOWLD’s strong branding and dividend yield proposition.

Developing Pulai. ECOWLD has announced a proposed acquisition of 13 parcels of freehold land amounting to 240.3 acres in Mukim Pulai, Johor Bahru for RM450.1m (or RM43/sq ft). The acquisition is tied with a conditional development agreement with Permodalan Darul Ta’zim Sdn Bhd (PDT), a state-owned investment holding company which will facilitate in applying and obtaining the necessary development approvals for the land’s development. Tentative plans include the development of a mixed residential (consisting of affordable high-rise and landed homes) and commercial township with a preliminary GDV of RM3.88b. The launch date of the development has yet to be announced, subject to the completion of the acquisition by CY24.

A notable premium. We distinguished that the price tag of RM43/sq ft is carrying a premium when compared to its immediate adjacent Eco Botanic and Eco Botanic 2’s land, with the latter being purchased at RM35/sq ft (also jointly with PDT in Dec 2019). We opine that this could be due to the established maturity of Eco Botanic and Eco Botanic 2’s townships which have uplifted the land value within that area. Access to the already developed commercial area may further bolster the desirability on nearby developments, warranting the premium.

Overall, we are positive with the proposed land acquisition and pending development attached. As per FY23’s reporting, Eco Botanic and Eco Botanic 2 enjoyed a collective take-up rate of 86%, indicating a strong reception for its products within the Pulai region. The deal will be funded by internal funds over a 5-year instalment period, which will not overly stretch the group’s gearing. That said, assuming if the group is to undertake a lumpsum payment, net gearing would remain within manageable levels at 0.33x (from 0.24x).

Forecasts. Maintained, pending completion of the above-mentioned deal.

Valuations. We maintain our TP of RM1.00 with an unchanged 50% discount to RNAV (vs. an average of 55% for its peers). Assuming its completion, the acquisition would increase our total RNAV/share to RM2.06 (from RM2.00), hence increasing our TP to RM1.03.

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.

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, these merits could already be priced in following the rally in the past few months, unfavourably skewing its risk-to-reward. Hence, we downgrade to UNDERPERFORM from MARKET PERFORM.

Risks to our call include: (i) a strong upturn in the local property market, (ii) more favourable mortgage rates, improving affordability, (iii) lower construction cost, and (iv) risks associated with overseas operations.

Source: Kenanga Research - 19 Jan 2024