In a class of its own

The undisputed industry leader. A relatively new property developer with only three years of history, Eco World Development (ECW) has been able to sell properties at an unprecedented pace, reflecting property buyers’ confidence in the group’s strong brand name. After booking RM3.2bn/RM3.0bn/RM3.8bn gross sales in FY14 -FY16, respectively, ECW is targeting RM4bn gross sales in FY17 (including JV portion) despite the relatively weak property market where most of its peers are having slower sales performance. ECW has clearly been gaining more market share at the expense of its competitors. Explosive growth ahead. We are projecting an explosive 3-year earnings CAGR of 33% over FY16-19F, due to its relatively smaller profit base at this juncture. This is supported by its all- time high unbilled sales of RM4.9bn as at end-Oct 16 which will underpin earnings up to FY19. In anticipation of better cashflow with the hand-over of completed units as well as the completion of a proposed private placement by 1QCY17, ECW’s balance sheet is expected to remain healthy and accommodative for its aggressive expansion plans. Listing of Eco World International by 1QCY17. ECW is looking to venture overseas via a proposed subscription of a 27% stake in Eco World International (EWI) which has significant exposure to London and Sydney. This will further cement its earnings growth from FY18 onwards upon completion of projects, though EWI will incur losses in FY17.

Valuation

We maintain our TP of RM1.80, based on a 20% discount to our RNAV. We believe ECW deserves to trade at a lower discount relative to its peers given its prominence as the bellwether of the Malaysian property sector with ongoing outperformance in a weak market. We continue to like ECW for the proven and impeccable track record of its key senior executives, who have helped the developer to establish strong brand recognition among property buyers.

Key Risks to Our View

Relatively weaker property sentiment. The surge in property prices over the last few years could weaken property sales as buyers turn more cautious.

Strong FY16

4QFY16 results met expectations. 4QFY16 (FYE Oct) earnings increased by 49% y-o-y (but dipped 34% q-o-q) to RM29.3m. This takes FY16 earnings to RM129m, constituting 100% of our FY16 full-year projection. The strong performance was largely attributable to steady progressive recognition from its 11 ongoing projects.

Steady progress billings. 4QFY16 revenue came in at RM741m (+2% q-o-q, +9% y-o-y) due to a higher percentage of completion of the group’s ongoing projects in the Klang Valley, Iskandar Malaysia and Penang.

Aggressive launch in 4QFY16. Nevertheless, 4QFY16 EBIT margin dropped to 8.6% compared to 10.5% in 3QFY16 and 9.8% in 4QFY15. This is due to its ramp-up in marketing activities and expenses for new sales gallery during the quarter. Recall that ECW had a concurrent launch of four projects under the Eco World’s First Campaign in Sep 16 which had received overwhelming response.

Impressive sales in 4QFY16. ECW achieved RM2.18bn new sales in 4QFY16, which is higher than its collective sales in 9MFY16 of RM1.64bn due to the mega launch of four projects concurrently during the quarter. This takes ECW’s FY16 sales to RM3.8bn (including JV portion), excluding ECW’s pro-forma 27% share of FY16 sales from Eco World International’s projects.

RM4bn sales target in FY17. This will be contributed by its existing 15 projects as well as another two new flagship projects to be launched in FY17 (Eco Forest in Semenyih and Eco Horizon in Penang). This has yet to take into account its proportionate share of international sales achieved by EWI, based on ECW’s proposed 27% shareholding in EWI that is expected to be listed by 1QCY17.

Cut FY17/18F earnings by 28%/22%. This is after incorporating ECW’s share of losses from EWI in FY17, higher financing cost as well as initial losses from its JV projects (Eco Grandeur and Eco Ardence). Nevertheless, this is likely to reverse after the initial gestation period as the projects enter the growth stage from its infancy stage.

Maintain BUY. We notice that ECW has been gaining more market share in the property market at the expense of its peers over the last two years. This is indeed unprecedented for a relatively young developer with only three years of operating track record to gain such a significant milestone. For instance, FY15-FY16 has been a challenging period for most large developers as sales dipped. However, ECW bucked the trend with stellar sales performance as its flagship launches remained well-received. In addition, ECW relies entirely on its internal marketing and sales team to achieve strong sales, thanks to the strong brand name. This is in contrary to other developers which have been increasingly engaging external property agents to market their products against the backdrop of a more subdued property market.

Source: Alliance Research - 9 Dec 2016