KUALA LUMPUR: CIMB Equities Research retains its positive view on Eco World International (EWI) as it expects the property company to turn profitable in FY18F after the handover of units for London City Island and Embassy Gardens.
“The sharp decline in its share price since its IPO is unjustified, in our view. We maintain our Add call and target price of RM1.21, based on RNAV.
“An improving sales performance is the key potential re-rating catalyst. While the new deal may incur additional costs near term, we believe it will benefit EWI in the long run,” it said on Tuesday.
However, the research house said the key risks to its Add call are a weaker pound sterling, disappointing sales and execution risks.
On Monday, EWI announced that it had completed the stage 1 acquisitions of its JV with Be Living Holdings (sister company of Willmott Dixon), following the settlement of the provisional stage 1 consideration of £63.8m (c.RM348.5m).
Stage 1 acquisitions include: (i) the acquisition of a 70% stake in six sites (which are at various stages of obtaining planning consent, via Assetco), and (ii) the acquisition of a 70% stake in Be Living’s development management platform (via DMco).
“We are positive on the completion of stage 1 acquisitions as the additional six project sites, with an estimated gross development value (GDV) of £1.1bn, will double EWI's remaining GDV of £1bn from its ongoing UK projects,” it said.
CIMB Research pointed out that five out of the six sites (i.e. except the Barking Site) have secured planning consent; this will enable the projects to be launched within the next one to two years.
It also said Kensal Rise (c.100 units) and Millbrook Park (c.100 units) have launched phases that scheduled to be completed in FY10/18.
“Assuming a 100% take up rate with a PBT margin of 20%, these two projects will likely contribute c.£12m additional earnings in FY10/18F based on EWI’s 70% stake. However, we believe the contributions will be largely offset by the higher overheads in DMco due to the addition of 110 experienced staff,” it added.
EWI also signed definitive agreements for the stage 2 acquisitions of the JV for a consideration of £40.4m based on 70% stake (c.RM220.6m).
The purchase consideration will be funded via bank borrowings, other debt instruments and/or internally generated funds.
“The stage 2 acquisitions will potentially add another six sites with an estimated GDV of £1.5bn to EWI’s portfolio,” it said.
Upon completion of stage 2, EWI’s total number of projects in the UK will increase from three projects to 15. The group aims to complete the acquisitions of Kew Bridge and Aberfeldy Village sites within FY10/18.
Pre-acquisition, 29% of EWI’s existing developing units are priced at >£1,400 per sq ft and the remaining 71% between £801-1,400 per sq ft.
Post stages 1 and 2 of the acquisitions, its product portfolio will become more diversified over the medium to long term at multiple price points and varying stages of development, duration and completion periods.
Post deal, the percentage of units priced at less than £1,400 per sq ft will reduce to 12%, the proportion of £801-£1,400 per sq ft units will reduce to 29%, and the remaining 59% will come from units priced £500-£800 per sq ft.
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