EcoWorld expects sales to improve in next few quarters

Eco World Development Group Bhd (March 30, RM1)

Maintain add with a lower target price (TP) of RM1.42: Eco World Development Group Bhd’s (EcoWorld) first quarter of financial year 2018 (1QFY18) core net profit (CNP) (excluding RM94.8 million gain on disposal of a 40% stake in Eco Grandeur in the first quarter of 2017) came in within expectations at 13% of our full-year forecast and 14% of the Bloomberg consensus number as we expect a stronger second half of FY18 (2HFY18). 1QFY18 CNP rose 21% year-on-year (y-o-y) despite a lower revenue (-5% y-o-y), mainly due to prudent cost control, whereby selling and marketing expenses (-24% y-o-y) and administrative costs (-23% y-o-y) came down significantly.

The lower selling and marketing expenses were due to an increase in the use of social media platforms to connect with its customers and more localised marketing activities led by the EcoWorld Residence Club, while the lower administrative expenses were due to the implementation of cost-saving initiatives at both the corporate and project levels. We expect these expenses to come in lower versus the FY17 level, in line with its cost-savings strategy.

EcoWorld recorded RM602 million of new property sales in the cumulative four months of FY18 (4MFY18) (versus RM955 million in 4MFY17), at 17% of its RM3.5 billion FY18 sales target. The first four months of the financial year fall within a seasonally slower period for property sales in the lead-up to Christmas until Chinese New Year (CNY). Despite the slower start, management is optimistic that sales will improve in the next few quarters of FY18 based on an encouraging pickup in sales interest following the success of its campaign and marketing events during CNY.

We fine-tune our FY18 to FY19 earnings forecasts by 1% to reflect the changes in Eco World International Bhd’s (EWI) earnings contribution due to higher interest costs. We still expect EcoWorld’s earnings to come in stronger y-o-y due to a higher revenue recognition as 10 projects will have transitioned from the investment into the growth phase of their project life cycles, plus joint-venture (JV) projects reaching a higher stage of completion, and its 27%-owned EWI turning profitable in FY18 forecast (F).

Our TP is cut to RM1.42 as we widen our revalued net asset valuation (RNAV) discount to 30% from 20% previously, after factoring in the rising interest rate environment. We upgrade the stock to “add”, although the overall property market remains flattish, given: the year-to-date (YTD) share price has fallen sharply by about 28%, as it is trading at only 0.7 times its FY17 book value, and FY18 to FY19 earnings outlook is expected to be stronger. We believe the current share price weakness represents a good opportunity for investors to accumulate the stock.

Improving earnings and attractive valuations are key potential rerating catalysts for its share price. A sudden deterioration in property market sentiment is the key downside risk to our call. — CGSCIMB Research, March 30

This article first appeared in The Edge Financial Daily, on April 2, 2018.

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