ECOWLD is disposing 123.1 acres of its land in Eco Business Park VI in Kulai, Johor, for RM402.3m. We estimate that it will report a gross gain of RM202.7m (based on its 60% stake in the land). We raise our FY25F earnings forecast by 2%, lift our TP by 8% to RM1.37 (from RM1.27) but maintain our UNDERPERFORM call.

ECOWLD is disposing of its industrial land measuring 123.1 acres in Kulai, Iskandar Malaysia to Microsoft Payments (M) Sdn Bhd for RM402.3m, which is located within its Eco Business Park VI (EBP VI) development. It anticipates the land sale to be finalized in 2HCY25.

At RM75 per sq ft (psf), we believe ECOWLD is selling the land at a significant premium to asking prices of about RM35psf in the area, we believe, given attributes of the land that could be conductive for the development of a data centre (for instance, its close proximity to utilities). Based on ECOWLD’s acquisition cost of RM12 psf in Sep 2023, we estimate that it will report a gross gain of RM202.7m (based on its 60% stake in the land).

Overall, we are positive on the land sale as the presence of an internationally recognised technology leader choosing to set up a sizeable data centre here will further drive demand for EBP VI’s other industrial products. Additionally, its nearby residential products are likely to benefit significantly from the spill-over effect of increased job opportunities within the Eco Business Parks, driving heightened interest and potentially higher property values in its area.

The proceeds will reduce its net gearing of 0.28x as at end-1QFY24 to 0.2x.

Forecasts. We raise our FY25F earnings forecast by 2% to reflect interest savings from the proceeds.

Valuations. We also raise our TP by 8% to RM1.37 (from RM1.27), having factored in the gains from this land sale and revised up the potential earnings for the remaining 280.6-acre land in the same project. The discount to RNAV we accord to ECOWLD is unchanged at 50%, which is slightly lower than an average of 55% for its peers to reflect stronger realisability of its projects. 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 sen/share assuming a 60% payout) following a lumpy dividend of RM214m from EWINT. However, its valuations are rich. Maintain UNDERPERFORM.

Risks to our call include: (i) recovery in the local property market, (ii) easing mortgage rates improving affordability, (iii) lower construction cost, and (iv) better overseas operations.

Source: Kenanga Research - 11 Jun 2024