CIMB Research retains Add for Eco World

KUALA LUMPUR: CIMB Equities Research is keeping its Add call for Eco World Development with a slightly higher target price of RM1.75 from its earlier RM1.70.

It said on Friday Eco World is proposing a 50:50 joint venture with Cascara Sdn Bhd to develop a 534-acre land adjacent to Setia Alam, Klang Valley.

“The implied land acquisition price is RM56 psf, which we believe is fair. The target price, based on 20% discount to realised net asset value (RNAV), is raised by 3% to RM1.75 after adding the surplus value from the land into our RNAV computation.

“Maintain Add recommendation. EPS forecast is also unchanged as the group retained its FY16-17 sales targets. Eco World is our top pick for the sector,”  it said.

Cascara, a private company, currently owns the land via its subsidiary Jendela Hikmat. Eco World will acquire 50% stake in the latter from Cascara for RM304mil (US75mil). The purchase consideration was derived after deducting the net liability of Jendela Hikmat from the agreed value of the land. Eco World said it may seek external financing to fund the acquisition.

CIMB Research said the land is located adjacent to SP Setia’s Setia Alam township.Remote and hardly accessible just 12 years ago, Setia Alam is now a vibrant township. 

Setia Alam’s success story has been synonymous with SP Setia’s phenomenal growth in the past decade and many Eco World’s management personnel were directly involved in Setia Alam’s development.

The JV represents the latest addition of township projects under the “EcoWorld” brand. To be known as Eco Ardence, its gross development value (GDV) is estimated to be RM8.6bn and the entire development is expected to be completed within 15 years.

“We understand that Eco Ardence will target mainly the upgraders in the locality as well as affluent homebuyers. Judging from the estimated GDV of the project, we believe the minimum starting price of landed houses in Eco Ardence will be above RM1mil per unit,” it said.

CIMB Research said although the current demand for upmarket properties is weaker than that for the mass, it believes Eco Ardence will receive decent interest from homebuyers as the supply of landed properties in the Klang Valley has been low in the past few years. 

The JV is expected to be finalised in 4Q16 and Eco Ardence could potentially start generating sales in FY17. 

“Overall, we think the addition of Eco Ardence is a positive surprise as it raises Eco World’s GDV by 13% to RM74bil.

“The JV structure also minimises the impact on Eco World’s gearing as the JV’s debts will not be consolidated into Eco World’s book. Based on its financials as at Jan 2016, we estimate the acquisition will raise Eco World’s net gearing ratio from 47% to 57%.

“While the ratio could rise further as Eco World completes more acquisitions, we believe its cash flows, backed by large unbilled sales of RM4.3bil, would remain manageable,” said CIMB Research.

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