EcoWorld expected to meet sales target

Eco World Development Group Bhd (Sept 15, RM1.59)

Maintain hold with an unchanged target price of RM1.70: Eco World Development Group’s (EcoWorld) nine-month (9MFY17) core net profit made up 90% of our and 69% of Bloomberg consensus full-year forecasts. The results were above expectations due to lower-than-expected selling and marketing expenses, and lower losses at Eco World International (EWI). Third quarter of financial year 2017 (3QFY17) core net profit declined 41% despite higher revenue due to lower gross margin, higher finance costs, and higher losses from joint ventures. Unbilled sales stood at RM6.2 billion at end-August 2017, translating into 2.4 times FY16 revenue.

EcoWorld’s 3QFY17 revenue rose 5% year-on-year (y-o-y) due to higher construction progress, and higher number of units sold. Nonetheless, 3QFY17 earnings came in lower y-o-y on the back of lower gross margin (down 0.6 percentage points to 21.4%). We believe EcoWorld’s gross margin should gradually recover in the coming quarters due to stronger construction progress. However, the weak gross margin trend in 9MFY17 suggests that its FY17 gross margin is likely to be lower than FY16’s 23%.

The group sold RM772 million worth of properties in 3QFY17, up 40% y-o-y. It also disclosed that 10MFY17 sales amounted to RM2.4 billion. While this is only 60% of its full-year sales target of RM4 billion, the group remains confident of achieving the target. It is planning three major launches in the Klang Valley and Penang. We think these launches will enjoy healthy take-up rates.

EcoWorld is planning to launch three new projects, namely Eco Forest and Eco Business Park V in the Klang Valley, and Eco Horizon in Penang. Preparations are well underway to ramp up the launches of these projects. We believe EcoWorld’s FY17 sales target is achievable as its sales typically pick up in the second half of its financial year.

We increase our FY17 earnings per share (EPS) by 16% to reflect lower expenses and lower-than-expected losses in 27%-owned EWI. Nonetheless, we cut our FY18-FY19 EPS by 2%-6% to reflect higher marketing expenses at EWI as the company ramps up sales for all of its projects in the UK over the next two forecast years. — CIMB Research, Sept 15

This article first appeared in The Edge Financial Daily, on Sept 18, 2017.

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