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Wednesday, June 29, 2016

CIMB Research retains Eco World target price at RM1.75

Wednesday, 29 June 2016 | MYT 8:19 AM
CIMB Research retains Eco World target price at RM1.75

KUALA LUMPUR: CIMB Equities Research is retaining its target price for Eco World Development Group Bhd at RM1.75, which is an upside of 37.8% from its last traded price of RM1.27.

It said on Wednesday the first half net profit was at 55% of its FY10/16 forecast and 48% of consensus, beating expectations due to lower-than-expected selling and marketing costs.

The research house said Eco World also announced the acquisition of Eco Horizon land in Penang for RM875mil and the Employees Provident Fund’s expression of interest (EOI) to participate in five of Eco World’s projects.

“We raise FY16-18 EPS by 8-30% for higher profit margin but maintain TP, based on 20% discount to RNAV. Maintain Add with higher sales as key re-rating catalyst,” it said. Key downside risk to its Add call is deterioration in sentiment on local property.

Eco World’s 2Q16 net profit rose 194% on-year on the back of higher revenue and better EBITDA margin. Faster construction progress raised revenue by 47% on-year in 2Q16.

Although gross margin declined marginally from 24.6% in 2Q15 to 24% in 2Q16, EBITDA margin improved from 6.5% to 10.3% as higher revenue resulted in lower fixed cost-to-sales ratio. Unbilled sales at end-May 2016 rose 40% on-year to RM4.5bil.

“The group sold RM1.05bil worth of properties in 1H16, 2% lower on-year. This was an outstanding performance, as many big developers in Malaysia saw double-digit decline in 1QCY16 sales. Although 1H16 sales made up only 26% of its full-year target of RM4bil, Eco World remains confident that it will achieve its target as upcoming launches would drive up sales,” it said.

Concurrent with the release of 2Q16 results, Eco World announced the acquisition of Eco Horizon land (two parcels of land measuring 375 acres on mainland Penang) for RM875mil. Eco Horizon’s gross development value (GDV) is estimated to be RM7.8bil.

This acquisition is a positive surprise as it raises Eco World’s GDV by 11% to RM80bil and it may start generating sales in FY17. The land price appears fair as it makes up only 11% of the project’s GDV.

“We were pleasantly surprised to learn that Eco World has received an EOI letter from the EPF indicating that it is keen to participate in Eco World developments in 1) Ijok, 2) Setia Alam, and 3) Eco Horizon land. Eco World is in the midst of acquiring the land for these developments for total cost of RM2.4bil. We believe EPF’s participation would ease investors’ concerns about Eco World’s gearing level,” it said.

Eco World’s net gearing stood at 55% at end-April 2016. Although it plans to raise about RM768mil from a private placement this year, net gearing could still increase by end-FY16 as it plans to subscribe for a maximum 30% stake in its sister company, Eco World International Bhd, during its IPO.

Despite the rising net gearing, CIMB Research believes Eco World’s gearing remains manageable as its cash flow is backed by high unbilled sales of RM4.5bil, which would translate into cash inflow over the next few years.

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