Eco World remains an Add at CIMB Research

CIMB Research says Eco Worl is its top pick as it offers the highest share price upside among the developers in its coverage

KUALA  LUMPUR: CIMB Equities Research is retaining its Add call for Eco World Development Group Bhd due to its strong earnings growth potential. 

“Rising profitability could be a key potential re-rating for Eco World’s share price,” it said on Friday as it maintained its target price of RM1.75, which was 26.8% over the last traded price of RM1.38.

CIMB Research said the earnings prospects for Eco World over the next three years, although almost certainly slower than the 75% net profit compounded annual growth rate (CAGR) it achieved in FY13-16, could be the strongest among all the developers in its coverage. 

Eco World’s 4Q16 net profit jumped 49% on-year to RM29mil (US$7mil), driven by higher revenue, which rose 9% on-year in the same quarter. 

As Eco World started its business just slightly more than three years ago, its fixed costs increased faster than its revenue as new property sales take three to four years to translate into revenue. 

As a result, a slight change in revenue could result in a bigger swing in its bottomline. Eco World did not declare any dividend, as expected, given that the group is expanding rapidly.

The research house said the group achieved its RM4bil sales target for FY16, after securing RM1.8bil sales in Malaysia in 4Q16 and including the 27% share of its sister company, Eco World International’s (EWI), sales worth RM608mil (gross value was RM2.3bil). 

Included in the RM1.8bil sales in Malaysia were 1) sales of settler housing in its Eco Grandeur project valued at RM247mil and 2) its 40% share of sales of retail spaces by its joint venture
BBCC Development worth RM189mil (gross value was RM473mil).

“Eco World targets to achieve RM4bil gross new property sales in Malaysia (excluding EWI’s sales) in FY17. 

“We expect the group to extract more of its sales from the recently launched projects, namely BBCC, Eco Grandeur and Eco Ardence rather than from its existing projects. Since sales from new projects take a longer time to translate into revenue compared to mature projects, we lower our FY17-18 revenue projection by 18- 30%.

“We also lower our FY17 gross sales forecast from RM4.9bil to RM4bil, in line with the group’s target. The lower property sales and revenue lead us to reduce our FY17-18F EPS by 35-41%. Despite the sharp earnings cut, we still expect Eco World to deliver a 30% net profit CAGR in FY16-19, driven by rising new property sales and revenue,” it said.
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