EcoWorld confident sales targets will be met
Eco World Development Group Bhd (June 16, RM1.65)
Downgrade to market perform with an unchanged target price of RM1.72: Eco World Development Group Bhd’s (EcoWorld) first half financial year 2017 (1HFY17) core net profit (CNP) of RM55.1 million was within our expectations but below market expectations.
Sales of RM1.71 billion for the cumulative seven months of FY17 (7MFY17) came broadly within expectations, while its associate Eco World International Bhd’s (EWI) RM1.38 billion sales are behind our target.
There were no dividends, as expected. The financial year ending October 31, 2017 (FY17) estimates of a sales target of RM4 billion is intact while EWI has introduced its new sales target of RM2.5 billion.
The 1HFY17 CNP of RM55.1 million was below market but within our expectations at 35% of street consensus, and 49% of our FY17 estimates. We believe the market may be overly optimistic with group margins.
Quarter-on-quarter, the second quarter of 2017 CNP of RM33.7 million was up by 58% on improved billings (up 13%) and reduction in administration expenses (down 22%) resulting in a 1.1 percentage point (ppt) expansion in earnings before interest and taxes (Ebit) margins to 10.1%.
Furthermore, effective interest rates rose to 32.6% from 11.7% due to non-deductible expenses while interest rates are expected to be closer to the statutory rate once earnings normalise.
Year-on-year, 1HFY17 CNP marginally declined (down 1%) although billings improved (up 17%) as finance cost rose by 166% to RM26.1 million on equity financing arising from its associate projects/EWI. Net gearing is now at 0.7 times (versus 0.54 times in 1QFY17).
The group remains confident of meeting its sales targets. In terms of new launches, the group intends to roll out Eco Business Park V, Eco Forest and Eco Horizon/Sun in 2HFY17.
While we scale down EWI’s FY17 sales estimates by 19% to18% to RM2.53 billion to RM2.67 billion, there is no major impact to EWI’s earnings as we have toned down take-ups from projects, which will only start contributing from FY19 onwards.
Unbilled sales of RM6.32 billion (local: RM4.9 billion; EWI: RM1.42 billion at effective stake and project levels) is an industry high, providing two to three years of earnings’ visibility.
While we still like EcoWorld for its branding strength, aggressive growth strategies, ability to grab market share and strong management team, we think the recent share price momentum has been overly aggressive, potentially driven by mergers and acquisitions (M&A) speculations.
Hence, we downgrade our call from outperform to market perform and will review our recommendation if there are catalytic news (such as M&A), sales/earnings surprises or sharp retracement in share price.
Risks to our call include weaker/stronger-than-expected property sales, lower/higher-than-expected sales/administrative and finance costs, changes in real estate policies, and changes in lending environment. — Kenanga Research, June 16
This article first appeared in The Edge Financial Daily, on June 19, 2017.