Eco World’s sales on track with major drivers from Klang Valley projects

Eco World Development Group Bhd (Sept 18, RM1.60)

Maintain outperform with a lower target price (TP) of RM1.90 from RM2.05 previously: Nine months of financial year ending Oct 31, 2015 (9MFY15) earnings of RM24.3 million made up 52% of street’s full-year estimate and 65% of ours. We deem this as broadly within our expectations as we expect fourth quarter of FY15 (4QFY15) to see a similar billings momentum as in 3QFY15.

10MFY15 sales were at RM2.37 billion which are within expectations, accounting for 79% of both our and management’s FY15 target of RM3 billion. Major drivers are from Klang Valley projects, consisting 57% of sales such as Eco Majestic and Eco Sanctuary, while Johor has fared well with projects such as Eco Spring, Eco Tropics and the Eco Business Parks (I & III), comprising 41% of sales.

3QFY15 earnings were down by 20% despite a 9% increase in revenue. Earnings before interest and tax margin compressed by two percentage points to 4.5% due to higher marketing and administrative costs.

Development margins were also slightly compressed on a lower margin mix and a substantially higher effective tax rate of 40.3% (2Q15: 33.2%) due to high amounts of non-deductible expenses.

Year to date (YTD), year-on-year (y-o-y) comparisons are not reflective since there were no equivalent periods provided given the change in financial year end from September to October.

Eco World is still targeting an initial public offering (IPO) listing of Eco World International Bhd (EWI) via the market capitalisation route by the first quarter of calendar year 2016. To recap, the IPO aims to raise RM2 billion while Eco World is still interested to take up a 30% stake. The new listing route will enable EWI to be more marketable to a greater pool of investors.

The company remains confident of achieving its RM3 billion sales target for the year.

No significant changes to FY15 estimate, but lowered FY16 estimate earnings by 30%. In view of the challenging property market, we lower FY16 estimate sales by 11% to RM3.2 billion but maintain FY15 estimate sales at RM3 billion.

We have also expedited our billing assumptions as billings to date are stronger than expected, but this was more than negated by higher cost structures from sales and marketing, administrative expenses and higher effective tax rate assumptions. Unbilled sales of RM3.99 billion provide two years of visibility.

Lower TP to RM1.90 from RM2.05 previously, based on a wider discount rate of 45% from 40% previously to its fully diluted (FD) revalued net asset valuation (RNAV) of RM3.17.

Although sales and earnings are on track, the sector’s sentiment has been severely affected by global and domestic economic uncertainties.

Our big-cap developers’ (of more than RM1 billion) average FD RNAV discount rate has widened from 49% to 54% in the last three months.

In view of the sector de-rating and Eco World’s higher-than-expected margin compressions which have led us to lower FY16 estimate earnings, we opt to widen the discount applied to Eco World by the same quantum as the big-cap developer’s average.

A slight premium is warranted to the sector’s average discount factor due to the group’s aggressive expansion plans, reputable management team and positioning as a township developer which will benefit from the resilient demand. — Kenanga Research, Sept 18

This article first appeared in the digitaledge DAILY on Sept 21, 2015. Subscribe here.