Eco World 9M net profit beats expectations, says CIMB Research

KUALA LUMPUR: Eco World Development Group Bhd’s 9MFY16 net profit beat expectations, making up 92% of CIMB Equities Research full-year forecast and 86% of consensus.

The research house said on Wednesday the outperformance was driven mainly by lower-than-expected selling and marketing expenses. The property developer maintained its RM4bil sales target for FY16.

“We raise FY16-18F EPS by 6%-25% to account for lower selling and marketing expenses. Maintain Add and target price of RM1.75, still based on 20% discount to its RNAV,” it said.

To recap, Eco World’s 3QFY10/16 net profit rose 374% on-year to RM45mil on the back of higher revenue. Revenue grew 60% on-year to RM727mil, driven by faster work progress. 

Eco Sanctuary and Eco Meadows, which were launched in FY15, also started to contribute revenue in 3QFY16. The higher revenue lifted Eco World’s EBITDA margin to 11% in the quarter from 4% last year as its fixed costs were spread more thinly over a bigger pool of revenue. Unbilled sales rose 18% on-year to RM4.7bil as at end-August 2016.

CIMB Research said the earnings outperformance in 3QFY16 was driven mainly by lower selling and marketing expenses, which fell 30% on-year to RM24mil. These expenses could increase in 4QFY16 as it recently held several major events to promote its brand and products.

“We expect weaker earnings in 4QFY16 due to higher selling and marketing expenses
RM2.2bil sales in 10MFY16. Eco World sold RM2.2bil worth of properties in 10MFY16, 7% lower on-year. 

“The lower sales were because of weaker sales performance in the Klang Valley, as sales there dropped 12% on-year to RM1.2bil. Sales in Johor also fell 3% on-year to RM935mil. Although
10MFY16 sales accounted for only 55% of its full-year target of RM4bil, the group remains confident of delivering the target,” it said.

CIMB Research said the group reiterated that its sales target of RM4bil includes sales from projects under the ECOWORLD brand name, which include those developed by its sister company Eco World International (EWI). 

The group intends to buy up to 30% stake in EWI. In 10MFY16, EWI achieved sales of around £400mil. Based on the spot exchange rate and a 30% stake, the group’s share of EWI’s sales was about RM645mil in 10MFY16. Including this, Eco World’s 10MFY16 sales were 71% of its full-year target

“We believe that Eco World’s full-year sales target is achievable as its sales in 4QFY16 should be stronger. The group launched RM1bil worth of properties over the previous weekend and recorded a take-up rate of 81%. These bookings should gradually translate into sales in the next few weeks.

“Eco World remains our top sector pick as it offers the highest share price upside among the property stocks under our coverage. We expect stronger sales to be the re-rating catalyst for Eco World’s share price. The downside risk to our call is deterioration in property market sentiment,” said the research house.