This article first appeared in Capital, The Edge Malaysia Weekly on April 3, 2017 - April 9, 2017

WHEN it comes to clout, Eco World International Bhd (EWI) is in an enviable position.

The foreign arm of Malaysian property developer Eco World Development Group Bhd (EW Bhd) will be making its Main Market debut this Monday with the goodwill and track record of respected property man Tan Sri Liew Kee Sin and financier tycoon Tan Sri Quek Leng Chan. Not only that, EWI has the support of the country’s top institutional funds — Permodalan Nasional Bhd, Kumpulan Wang Persaraan (Diperbadankan) and the Employees Provident Fund — as cornerstone investors (collectively taking an 8.9% stake) in what is touted as the largest Malaysian initial public offering (IPO) since June 2015.

That’s not all. Five of Malaysia’s six largest banks by assets are advising, coordinating, book-running or underwriting the IPO alongside two other peers. How’s that for too big to fail?

The track record and financial muscle backing EWI are important as the company has yet to turn in a profit and is essentially riding the trust and confidence in the ability of its key managers and leaders to deliver on its immense potential.

EWI is expected to be loss-making this year, post its maiden profit in FY2018 and a bigger one in FY2019. Unlike the progress billing practised here, EWI’s projects will only be booked upon their completion.

The lack of a profit track record is not unlike special purpose acquisition vehicles (SPACs), or so-called blank cheque companies, but EWI is in another league. It has physical assets and is already operating as a full-fledged property developer with 75% stakes in three existing joint-venture projects with Ballymore in London and one (100% stake) in Sydney, Australia.

The projects are London City Island (expected completion: 1H2019, estimated gross development value: RM3.76 billion/£691.3 million); Embassy Gardens, London (expected completion: 2H2021, estimated GDV: RM5.08 billion/£932.5 million); Wardian London (expected completion: 1H2020, estimated GDV: RM3.08 billion/£566.1 million); and West Village, Parramatta, Sydney (expected completion: 1H2020, estimated GDV: RM1.04 billion/A$314.8 million).

EWI’s total sales secured stood at RM6.49 billion out of a total estimated GDV of RM13 billion from the four projects as at Jan 31 this year. Of the 2,186 private residences launched in London, 63% or 1,370 units have been sold (54% of whose buyers are from the UK, 17% from Malaysia, 19% from Hong Kong and China, 4% from Singapore, 5% from the Middle East and North Africa and 1% from other places). In Sydney, 329 units or 83% of the 398 units launched have been sold (49% of whose buyers are from Australia, 19% from Malaysia, 22% from Hong Kong and China, 8% from Indonesia and 2% from Singapore).

Some 92% of EWI’s estimated GDV of RM13 billion is in London, which may be affected if the UK economy slows down due to its withdrawal from the EU, the IPO prospectus reads. Sales from the London projects will not be visible on EWI’s income statement as income is recognised as a share of joint-venture earnings, although it has 75% equity interest. That means, EWI’s top line will rise significantly upon the completion of the Sydney project in about three years based on its existing project portfolio.

EWI is up front on the risks, listing in its IPO prospectus at least 27 business risks, five industry risks, five (foreign) country risks and eight other risks related to its securities, which, EWI’s promoters say, investors should know and understand when investing in the company. These include its existing projects being “in the early stage of development” and its potential liability on any construction completion delay or purchaser default on pre-sold properties. The prospectus also warns of the risk of EWI not paying any dividend and it being subject to revenue, profit, operating cash flow and foreign currency volatility from operating in regulatory environments that may be different from Malaysia’s. In spite of management and board experience, EWI warns that past successes are no guarantee of future success.

At its IPO price of RM1.20, EWI is already sizeable — with a market capitalisation of RM2.88 billion upon listing, which is larger than that of Eastern & Oriental Bhd (RM2.67 billion), WCT Holdings Bhd (RM2.3 billion) and Tropicana Corp Bhd (RM1.47 billion). It is comparable to that of Malaysian Resources Corp Bhd (RM3.52 billion) and Mah Sing Group Bhd (RM3.54 billion), which were trading at less than 13 times earnings last Thursday.

EW, whose market capitalisation stood at RM4.48 billion last Thursday, owns 27% of EWI while Liew holds 10.3% in it.

EWI’s IPO price reflects 1.3 times its pro forma book value per share of RM1.06 as at Oct 31, 2016, according to its prospectus.

Inter-Pacific Research’s fair value of RM1.27 for EWI is based on 1.1 times FY2018 book value, similar to parent EW’s, but at a 39% premium to the 0.79 times of average Malaysian developers.

Public Investment Bank has a fair value of RM1.35 for EWI, at a 10% discount to its revised net asset value estimate of RM1.50. “Given the expected net profit of RM1.4 billion (over three to four years) from its current ongoing projects, we estimate EWI’s fair value at between RM1.40 and RM1.90 per share, if capitalised at 10 times its normalised annual earnings,” the research house says in a March 20 note.

Kenanga Research, meanwhile, has a target price of RM1.33 for EWI based on a 23% discount to its forward sum-of-parts valuation of RM1.72 per share, which assumes GDV replenishment of RM8 billion from the 75% stake over the next 12 to 18 months.

About 53% of the net proceeds of RM2.58 billion from EWI’s IPO will go towards repaying advances and bank borrowings, leaving about RM1.13 billion for working capital and future land acquisitions after netting off listing expenses (RM53 million) and settlement of the acquisition of EW Investment (RM38 million).

EWI’s IPO is also sweetened with two free warrants for every five EWI shares. The 960 million five-year warrants are convertible into ordinary shares on a one-to-one basis at RM1.45 apiece, being 121% the IPO price. Upon full conversion, as much as RM1.39 billion can be potentially raised for EWI for working requirements with its share base expanded from the current 2.4 billion shares to 3.36 billion shares.

Quek, whose UK exposure includes real estate as well as casinos (Rank Group Plc), is connected to EWI through a 27% stake held by Singapore-listed GuocoLand Ltd, which has established property operations in Singapore, China, Malaysia and Vietnam.

CIMB Investment Bank Bhd and Maybank Investment Bank Bhd are the IPO’s joint global coordinators. They, alongside Quek’s Hong Leong Investment Bank Bhd, are also joint principal advisers, book-runners and managing underwriters for the IPO. UOB Kay Hian Securities (M) Sdn Bhd is a joint book-runner while Alliance Investment Bank Bhd, AmInvestment Bank Bhd and RHB Investment Bank Bhd are joint underwriters.

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