Earnings turnaround anticipated for EWI

This article first appeared in The Edge Financial Daily, on December 19, 2017.
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Eco World International Bhd
(Dec 18, RM1.03)
Maintain add call with a higher target price (TP) of RM1.21:
Eco World International Bhd (EWI) posted lower-than-expected losses in financial year ended Oct 31, 2017 (FY17). 

FY17 core net loss (excluding foreign exchange [forex] gains and losses) was 79% of our loss forecast and 89% of Bloomberg’s consensus full-year loss forecasts, mainly due to savings on finance costs following the full settlement of borrowings upon receipt of the initial public offering (IPO) proceeds in April 2017, and lower joint-venture (JV) losses for its ventures in London. 

Unbilled sales as of end-October 2017 rose RM1.68 billion to RM5.85 billion, based on the exchange rates of RM5.58 to £1 and RM3.24 to A$1.

EWI recorded RM2 billion worth of new property sales in FY17, at only 80% of its RM2.5 billion full-year sales target. Projects in London contributed RM1.69 billion, while those in Australia generated RM315 million. 

The lower-than-expected sales were due to slower demand in Australia as homebuyers tend to buy closer to project completion. For FY18, EWI targets to achieve RM2 billion sales.

EWI has entered into a heads of agreement (HoA) to partner with Willmott Dixon to jointly develop 12 sites in Greater London and south-east England. EWI will acquire a 70% stake in the project sites as well as a 70% stake in Willmott Dixon’s development management arm, Be Living Holdings. Through the acquisition, EWI will have access to a sizeable land bank of approximately 8,200 residential units with a total gross development value (GDV) of at least £2.6 billion.

Upon completion of stage one of the acquisition of its 70% stake in Be Living Holdings, UK and the new project in Macquarie Park, Australia, EWI will have nine projects in the UK and three projects in Australia. 

The six project sites in the UK from stage one of the acquisition with an estimated GDV of £1.1 billion (RM5.93 billion) will likely be launched in the FY18 to FY19 period, while Macquarie Park with an estimated GDV of A$139 million (RM430.2 million) is expected to roll out in FY19.

We reduce our FY18 core net profit forecast by 34% due to the slower sales trend and changes in the handover schedule for the London City Island (LCI) project, but bump up FY19 earnings by 16% as we expect more units to be handed over from the LCI project in FY19. 

We expect EWI to report a major earnings turnaround in FY18 (from losses in FY17) as it recognises revenue upon the handover of some units for London City Island and Embassy Gardens.

We retain our positive view on EWI as we expect it to turn profitable in FY18 on the back of the handover of units. The sharp decline in its share price since its IPO remains unjustified, in our view. Maintain “add” call with a revised TP of RM1.21, as we roll over our revalued net asset valuation valuation to FY19. — CIMB Research, Dec 16