BBCC retail space buy to lift EcoWorld’s balance sheet burden

Eco World Development Group Bhd (Oct 14, RM1.34)

Reiterate outperform call with an unchanged target price of RM1.58: The Bukit Bintang City Centre (BBCC) retail space will be acquired by the BBCC Retail Portfolio joint venture (JV, which is 50%-owned by Mitsui Fudosan [Asia] Pte Ltd) for RM505.8 million. This is expected and will provide a relief to the group’s balance sheet while impact to its FD sum-of-parts is minimal.

We gather that the BBCC Retail Portfolio carries a gross development value (GDV) of RM1.6 billion out of BBCC’s total GDV of RM8.78 billion. The BBCC Retail Portfolio JV will buy the mall space of 1.35 million sq ft (125,419 sq m) and 2,400 car parks on a “land basis” at RM350 per sq ft (RM3,767 per sq m) and will construct it at the JV’s own cost, whereas the podium space of 40,000 sq ft (3,716 sq m) will be acquired on a completed basis at RM830 per sq ft (RM8,934 per sq m).

The news is not unexpected given the earlier heads of terms. Nonetheless, we are positive as it helps alleviate Eco World Development Group Bhd’s (EcoWorld) balance sheet burden because constructing the mall would tie up its cash flow as it will be kept for recurring income purpose by the BBCC Retail Portfolio JV company while EcoWorld will only own an investment stake of 12% in this JV.

Hence, more cash can be freed up for working capital of its saleable project. The mall will also be well managed by an experienced retail manager, namely the Malaysian Franchise Association, which will be a strong feature of the BBCC. However, we opt to maintain EcoWorld’s net gearing estimate for financial year 2017 (FY17) of 0.6 times at this juncture as we expect the group to deploy its resources to expediting ongoing projects.

EcoWorld will also recognise an effective sale of RM202.3 million from this exercise, equivalent to 40% of the total consideration, which will be reflected in its FY16 sales. We are maintaining our FY16 sales estimate of RM4 billion, which is still in line with management’s target, and thus, no changes to earnings.

Downside risks to our “outperform” call include weaker-than-expected property sales, higher-than-expected sales and administrative costs, negative real estate policies as well as a tighter lending environment. — Kenanga Research, Oct 14

This article first appeared in The Edge Financial Daily, on Oct 17, 2016. Subscribe to The Edge Financial Daily here.